John Maynard
Keynes
(1883–1946)
1
John Maynard Keynes: A
Revolutionary Economist…
• One the most important figures in the entire
history of economics
• Revolutionized economics with his classic book
• The General Theory of Employment, Interest
and Money (1936)
• Generally regarded as probably the most
influential social science treatise of the 20th
Century
• Quickly & permanently changed the way the
world looked at the economy and the role of
government in society
2
Early Life &
Education…
• Eldest son of John Neville
Keynes
• A Cambridge economist &
logician
• Raised in a Victorian
household in Cambridge
• Got a scholarship to Eton
school in 1897
• Excelled in mathematics &
classics
3
Cambridge & Early
Influences…
• ‘Apostles’ Society:
• A secretive student society, in his second term
• Lifelong Friendships:
• Literary figures such as Lytton Strachey &
Leonard Woolf
• Philosophical Influences:
• Influenced by philosophers like Bertrand
Russell, Alfred North Whitehead, & G.E. Moore
• Political Engagement:
• President of the Cambridge Union debating
society
• Campaigned for the Liberal Party in 1906
4
Career Beginnings…
• Civil Service Examination:
• Taking the civil service examination in August
1906
• Score: Only second
• Missing out prime spot at the Treasury
• India Office:
• Securing a position at the India Office
• Edwin Montagu: Keynes's old political mentor
in charge
5
London & India
Office
Experience…
• India Office in London:
• Working as a junior clerk in
the India Office in 1906
• Financial Reports:
• Examined financial reports
• Directed him towards
economics
• Handling large amount of data
• Began to think about the
problem of index numbers
• Writing a dissertation on
probability theory
6
Bloomsbury Group…
• Origins:
• The Bloomsbury Group emerged in London around 1905
• Weekly dinners
• Membership:
• Key members:
• Virginia Woolf, Clive Bell, Lytton Strachey & Leonard Woolf
• Center of Keynes's private & social life
• Core Member by 1911
• Cambridge-in-Exile:
• A place where former Cambridge Apostles could recreate the atmosphere
they had enjoyed as students
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Entry into Economics…
• Job Opportunity:
• Began lecturing in January 1909
• Needed a job
• Academic Success:
• Elected fellow of King's College
• Winning the Adam Smith Prize with an essay on index
numbers
• Published his first major economics article: On the Indian
economy
• Teaching Focus:
• Lectured primarily on money & banking
• Taking also on Pigou's principles class
• Appointed editor in 1911 of The Economic Journal
• Taking over from Francis Ysidro Edgeworth
8
Early Economic Views
• Keynes's early economics:
• Largely conventional Marshallian Neoclassicism
• Strong supporter of the Liberal Party
• Orthodox views on:
• Gold standard
• Quantity theory
• Laissez faire
• Free trade
• Limited Knowledge:
• Novice in economics: Having read very little outside of Marshall's Principles
• His education in economics began while editing the Economic Journal
• Forced to read the economics papers submitted to him
9
Indian Currency & Finance…
• Keynes's first book:
• Indian Currency and Finance (1913)
• Written in response to the "Indian silver scandal" of 1912
• British government in India:
• Needed to buy large amounts of silver
• BUT feared speculators would raise prices
• Avoiding official channels
• Samuel Montagu & Co. buy £5 million of silver on their behalf
• Revealed and seen as corrupt:
• Press tied the scandal to the "Marconi scandal" with anti-Semitic
overtones
• Insinuating a "Jewish conspiracy"
10
Royal Commission on Indian Currency…
• Keynes's Appointment:
• Appointed to the Royal Commission on Indian Currency and Finance in
1913
• Commission’s task:
• Consideration whether India should convert to a full gold standard or not
• Keynes's Position
• Keynes opposed the conversion to a gold standard
• Favored maintaining the existing gold-silver exchange system
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World War I Advisory Role…
• Banking Crisis:
• Keynes rushed to London to advise Lloyd George on a mounting banking
crisis
• WWI: Panic over the credit crunch & international payments system
• Convertibility Suspension:
• Lloyd George envisaged suspending convertibility to maintain the Bank of
England's gold reserves
• Keynes's Advice:
• Keynes advised the Chancellor to allow the Bank of England to use its
gold reserves to maintain the international payments
• Advice largely followed: Panic subsided
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Treasury Role During WWI…
• Keynes joined the Treasury in January 1915
• War Economy
• Assisted with financing the British war economy
• Rise in Treasury
• Keynes responsible for external finance
• Allied Support
• Britain financially supporting allies
• France, Russia, Italy, Belgium & Serbia
• American Loans:
• Borrowing from American banks to fund war effort (J.P. Morgan)
• Gold Standard
• Satisfying American lenders:
• Maintaining the pound on the gold standard
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Conflict with Lloyd George…
• British industries:
• Needed to export to maintain the pound's value
• Lloyd George:
• Favored diverting resources to the war effort
• Conscription Opposition:
• Keynes opposed conscription due to its impact on exports
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US Entry into WWI…
• Financial Crisis:
• US Federal Reserve instructed banks to curtail foreign lending in late 1916
• Keynes's Efforts:
• Urged the Treasury to find ways to
• Control war spending
• Raise revenue
• Reduce Allied demands
• Pressure finally relieved
• US entered the war in April 1917
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US Financial Negotiations…
• Funding Crisis:
• US Treasury refused to release government funds to Britain
• Preferring to tie them to purchases of US goods
• Keynes travelled to the US in September 1917
• Negotiated loan terms directly with the US Treasury
• Inter-Allied Funding:
• US agreed to subsidize Allied purchases of American goods, but the rest of their
borrowing needs were still sent to London
• In 1918:
• Keynes tried to negotiate with the Americans to take over a greater share of the
funding of Allies
• Without however losing British control of it
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German Reparations…
• Capacity to Pay:
• Keynes argued that reparations should be tailored to Germany's ability to
pay
• Versailles Conference:
• Keynes represented the British Treasury at the Versailles Peace
Conference
• Vindictive Treaty:
• Keynes was appalled by the
harsh reparations imposed on Germany
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German Reparations…
• Germany:
• Intertwined by trade to neighboring
countries
• Economic ruin meaning:
• Impoverishment of Europe
altogether
• Blamed the "Carthaginian peace" on the
short-sightedness of the statesmen &
delegates at Versailles
• Resignation:
• Keynes resigned from the conference
& the Treasury in protest
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Economic Consequences
of the Peace…
• Keynes published
• Economic Consequences of the
Peace in December 1919
• Denouncing the Treaty of
Versailles
• International best-seller”
• Catapulting Keynes into the
public spotlight
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Revision of the
Treaty…
• Public Opinion:
• Keynes believed public opinion had shifted
in his favor
• Reparations Reduction:
• Proposed a new plan to reduce German
reparations
• Debt Cancellation:
• Urged Britain & US to cancel debts owed by
European governments
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Treatise on
Probability…
• Publication of Treatise
on Probability in 1921
• Although it had
been practically
finished by 1913
• Dismantled the
classical theory of
probability
• Launched the "logical-
relationist" theory of
probability
• Connecting
probability to
information
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Monetary Reform…
• Tract on Monetary Reform:
• Argued against Britain's return to the gold standard at pre-war parity levels
• Managed Currency:
• Keynes advocated for a managed currency, with the Bank of England & the
Treasury focusing on stabilizing price levels & employment
• Cambridge Cash-Balance Theory:
• Keynes contributed to the Cambridge
cash-balance theory of money
• Normal Backwardation Theory:
• Keynes proposed his "normal backwardation" theory of hedging and
speculation
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Public Policy Debates…
• Keynes remained active in public policy debates
throughout the 1920s
• Channeled his views through articles in The Nation
& Atheneum
• Helped purchase the Liberal weekly magazine
in 1923
• Appointed his former Cambridge pupil, Hubert
D. Henderson, as editor in 1923
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Battle Against the
Gold Standard…
• Macmillan Committee Testimony in July 1924
• Keynes argued against the resumption of the
Gold Standard
• Treasury officials dismissed Keynes' views
• Britain returned to the Gold Standard in April 1925
• Keynes predicted dire consequences
• Outlined in his 1925 work
• "Economic Consequences of Mr. Churchill"
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Marriage to Lydia
Lopokova…
• John Maynard Keynes surprised his
Bloomsbury friends
• Marrying the Russian ballerina Lydia
Lopokova in 1925
• Keynes's marriage to Lopokova
• Apparently met with disapproval from
his Bloomsbury circle
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Unemployment
Policy…
• Persistent Unemployment
• High unemployment in the
1920s puzzled economists
• Government Investment
• Lloyd George proposed
government investment in public
works
• Outdated Policies
• Keynes condemned traditional
laissez-faire policies
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Liberal Industrial
Inquiry…
• Joined the executive committee of the
Liberal Industrial Inquiry
• Publication of a "Yellow Book" in 1928
• National Development Program:
• Calling for public capital expenditures
as employment policy
• Election Pamphlet:
• Writing an election pamphlet
• Can Lloyd George Do It?
• Setting out the economic case
for using public works to reduce
unemployment
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Political
Disappointments…
• Election Defeat
• Lloyd George's Liberal Party
lost the 1929 election
despite having new ideas
• Keynes's Disillusionment
• Keynes became
disillusioned with public
policy advocacy after three
repeated defeats
• Reparations
• Gold Standard
• Public Works
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Economic Advisory Council…
• Keynes persuaded Ramsay MacDonald (New Labor prime minister)
• Establish the Economic Advisory Council (EAC) in early 1930
• EAC consisted of:
• Two economists
• Two businessmen
• One union representative
• Intended to meet monthly with the prime minister to offer economic policy
guidance
• Disagreement:
• The Committee struggled to reach consensus on economic recovery measures
• Tariff Debate
• Keynes advocated for a tariff as a temporary recovery measure
• BUT others opposed it
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Treatise on Money…
• Keynes's Magnum Opus
• In 1930, John Maynard Keynes published his
• two-volume Treatise on Money
• Outlining his Wicksellian theory of the credit cycle
• Keynes believed this work would be his magnum opus, laying out the
rudiments of a liquidity preference theory of interest
• Hayek's Criticism:
• Friedrich von Hayek reviewed the Treatise harshly
• Leading Keynes to commission Piero Sraffa to review
Hayek's competing work
• Keynes-Hayek conflict:
• Significant battle in the Cambridge-LSE war for dominance in British economics
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The Circus Reading Group…
• A reading group, known as "the Circus"
• Formed by young Cambridge economists
• Richard Kahn, Joan Robinson, Austin Robinson, James Meade & Piero Sraffa
• Keynes's Revision
• Kahn reported discussions to Keynes, who revised his ideas
• Treatise Criticism:
• The Treatise lacked a theory of output & employment determination
• A particular pertinent question given the increasing amount of unemployment at the
time
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Income-Expenditure Multiplier…
• Keynes's Revolution
• Richard Kahn's theory of the income-expenditure multiplier provided the
foundation for Keynes's future economic revolution
• New Ideas
• Keynes began sharing his new ideas in articles and pamphlets
• Submitted drafts of his book for review
• Marginal Efficiency
• Keynes's ideas on the marginal efficiency of investment took longer to
develop
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The General Theory…
• In 1936:
• Publication of a new book
• The General Theory of Employment,
Interest and Money
• Heavily anticipated & cheaply priced
• Making it accessible to a wide audience
• Well-timed:
• World was still grappling with the Great
Depression
• Making a splash in both academic & political
circles
• “Everyone always knew that the economic
policies recommended by the Neoclassical
economists were bad policies; but now they
realized it was also bad economics”
33
Keynesian Concepts…
• Aggregate Demand
• Keynes argued that aggregate demand is the determining factor for
aggregate output & employment
• Demand-Determined Equilibrium
• Unemployment is possible in a demand-determined equilibrium
• Liquidity Preference
• Keynes developed a unique theory
of money based on "liquidity preference"
• Government Intervention
• Government fiscal and monetary policy
can help eliminate recessions & control economic booms
34
Keynesian Revolution…
• Young Economists
• Embraced Keynes's theories
• Older Economists
• Critical of Keynes's ideas
• Keynes's Response
• Keynes responded to his critics in a series of articles
35
IS-LM Model…
• Neoclassical-Keynesian Synthesis
• John Hicks's 1937 article introduced the "IS-LM"
model, which became the dominant form of
macroeconomics in the post-war era
• Cambridge Keynesians
• The "Cambridge Keynesians" and Post-Keynesian
school disputed the "Synthesis" twist on the
Keynesian Revolution
• Keynes's Original Message
• They argued that their versions of the theory were
more faithful to Keynes's original message
36
World War II Contributions…
• Keynes's Return
• Keynes re-emerged during World War II and published a pamphlet titled
"How to Pay for the War"
• Inflationary Gap
• Keynes identified the "inflationary gap" caused by resource constraints
during the war effort
• Compulsory Saving
• Keynes proposed "compulsory saving" and rationing to prevent price
inflation
37
Post-War Economic
Order…
• Bancor Proposal
• Keynes proposed an international clearing union,
"Bancor", to replace the Gold Standard.
• American "White Plan"
• Keynes eventually accepted the American plan
for an international equalization fund.
• Keynes's Influence
• Several key aspects of Keynes's clearing union
were incorporated into the final plan.
38
Bretton Woods
Conference…
• Keynes's Role
• Keynes led the British
delegation to the
Bretton Woods
conference in 1944
• System Details
• The conference
established a new
international
monetary system
39
Bretton Woods Conference…
• Fixed Exchange Rates
• Countries would maintain fixed exchange rates against the dollar
• Dollar-Gold Link
• The dollar pegged to gold
• International Institutions
• The IMF and World Bank were created to oversee the system
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Final Years & Legacy…
• Keynes's health deteriorated due to his demanding work
• He travelled to America in 1945 to negotiate a loan for Britain
• Keynes secured a $3.75 billion loan with 2% interest
• He died on April 22, 1946, before the loan was ratified
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