There was one preeminent economist during the course of the
20th century and that was John Maynard Keynes, the “Cambridge
Don,” as some would call him. And every time there is a
discussion in this country about budget deficits, inevitably the
brilliant British thinker”s name comes up.
Keynes lived from 1883-1946 and was a dominant figure in
many of the cataclysmic events of the century, particularly in the
case of the Versailles Peace Treaty following World War I, as
well as economic thought during the Great Depression.
Regarding the former, around the time of Versailles, Keynes
wrote the influential “The Economic Consequences of the Peace”
and was Britain”s leading financial representative at the Paris
talks. But he resigned from his delegation in disgust, labeling the
Versailles outcome a disaster. He was right.
Keynes”s main issue was that the victors required Germany to
pay reparations that it could not possibly hope to pay, which he
thought could lead to despair and revolution that would destroy
Germany and other countries. At the time many criticized him
for being too friendly to Germany, but look what happened in the
era which led to the rise of Hitler.
At the time of the Crash of 1929, Keynes was prominent in his
pronouncements on Americans and the market. [He lost a mini-
fortune himself during the market plunge.] And he argued at the
time that the Crash had the benefit of liquidating unsound
positions, with the money previously used for speculation now
being turned toward more productive enterprises.
Author Edward Chancellor quotes Keynes on investing as
follows. “(The game of investment is) intolerably boring and
over-exacting to any one who is entirely exempt from the
gambling instinct; whilst he who has it must pay to this
propensity the appropriate toll.” As Chancellor notes, how
appropriate a statement for today, just as it was centuries ago.
Keynes defined speculation as the attempt to forecast changes in
the psychology of the market and, with the release of his
landmark “The General Theory of Employment, Interest and
Money,” he attacked the earlier prominence given to speculators
and the stock market in the allocation of capital resources.
Keynes asserted that “There is no clear evidence from (recent)
experience that the investment policy which is socially
advantageous coincides with that which is most profitable.”
“Speculators may do no harm as bubbles on a steady stream of
enterprise. But the position is serious when enterprise becomes a
bubble on a whirlpool of speculation. When the capital
development of a country becomes a by-product of the activities
of a casino, the job is likely to be ill done.”
Well.hope this rings a bell.sounds awful familiar to me.
Keynes also promoted the theory that if one could not predict the
future with any degree of certainty, when it came to the stock
market what really mattered was the state of confidence, or what
is better known today as investor sentiment, which is the result of
the “mass psychology of a large number of ignorant individuals.”
Keynes”s comments about Americans and investing still hold
true today.
“Even outside the field of finance, Americans are apt to be
unduly interested in discovering what average opinion believes
average opinion to be; and this national weakness finds its
nemesis in the stock market.”
And when you look at your confirmation slip and notice a little
transaction fee or two, thank John Maynard Keynes who
suggested that a transaction tax be levied on U.S. share purchases
on the grounds that “casinos should, in the public interest, be
inaccessible and expensive.”
But it was during the Depression that Keynes really rose in
prominence as he became forever known for recommending an
increase in government spending, even if it meant creating large
deficits, as the only way to stimulate consumer demand by
reducing unemployment. To Keynes, deflationary measures,
such as cutting government spending, or encouraging companies
to limit production and thus keep prices artificially high were
counterproductive. This would only prolong the Depression by
reducing the demand for goods. The only way to break the cycle
was to spend, spend, spend.
In “The General Theory.,” Keynes established the foundation
of modern macroeconomics. And it became one of the treatise”
by which future arguments between “monetarists” and
“Keynesians” would be waged. So I turn to noted economist
Henry Kaufman to explain the chief difference between the two.
The monetarists” central tenet “is that inflation is caused by an
overabundance of money, and that control of the money supply
rests with the Federal Reserve.”
While Keynesians “argue that inflation often is caused by
nonmonetary developments such as wage increases and high
import prices. They advocate a flexible approach to fiscal
measures such as taxation and government spending to achieve
sustainable economic growth. They believe, in other words, that
demand for goods and services can be managed through flexible
fiscal policies.”
Armed with his philosophy, Keynes implored President
Roosevelt to spend his way out of the Depression. But this was
at a time in America when running a deficit just wasn”t
acceptable to most Americans. Folks were struggling to meet
their own meager budgets, how could the government spend like
a drunken sailor?
But Keynes continued to argue that easy money wasn”t enough.
[And it”s important to remember that short interest rates in
America during the Depression were in the neighborhood of
1.5% for years.as measured by the Federal discount rate.]
While during a mild recession lower interest rates might be
enough to jumpstart the economy, during a deep slump easier
credit was not enough; business confidence was often too low to
take advantage of cheaper money. [Again, think of today”s
environment, with the Fed”s aggressive action having little
benefit thus far.]
As Keynes put it, relying on easier money in a slump was “like
trying to get fat by buying a bigger belt.” And government had
an obligation to directly intervene to replace the lost purchasing
power of the unemployed by cutting taxes, and, more
importantly, through substantial spending on public works and
welfare.
[Keynes is more known for his stance on spending, as opposed to
tax cutting, but he was just as aggressive in his theories on the
latter, only that during his era few Americans were required to
pay taxes, so ”spending” became the key part of the equation.]
Despite Keynes”s pleas, however, FDR really didn”t spend like
legend would have it. Sure, there were programs like the PWA
and WPA, but they weren”t enough. Yes, it was the war that
pulled the nation out of the depths and it was only during WW II
that employment reached pre-1929 levels. The heavy
governmental spending during the war years seemed to confirm
the arguments of Keynesians. And the flip side was that by the
end of 1945, the national debt was 6 times larger than at the time
of Pearl Harbor.
Of course, over the decades Keynes has been associated with
liberalism and heavy government spending. But the political
argument gets distorted. For example, during the Reagan years
the president advocated reducing the size of government and
cutting taxes, but the reality was that government spending
soared due to the large increase in the defense budget. It really
was a pseudo-Keynesian policy, and while deficits soared, the
economy boomed. [I”m not taking this issue any further. No
arguments today.]
Following are some of the better known quotes from Keynes.
[Keynes hated Woodrow Wilson] “Like Odysseus, the President
looked wiser when he was seated.”
“In the long run we are all dead.”
“Capitalism, wisely managed, can probably be made more
efficient for attaining economic ends than any alternative system
yet in sight, but.in itself it is in many ways extremely
objectionable.”
“The important thing for Government is not to do things which
individuals are doing already, and to do them a little better or a
little worse; but to do those things which at present are not done
at all.”
[Of Lloyd George, another target] “This extraordinary figure of
our time, this siren, this goat-footed bard, this half-human visitor
to our age from the hag-ridden magic and enchanted woods of
Celtic antiquity.”
“It is better that a man should tyrannize over his bank balance
than over his fellow-citizens.”
[Explaining why he performed badly in the Civil Service
examinations] “I evidently knew more about economics than my
examiners.”
We will have far more on Keynes in future pieces, particularly
his leading role in the formation of the International Monetary
Fund and the World Bank.
Sources:
“Wall Street: A History,” Charles Geisst
“America: A Narrative History,” Tindall and Shi
“Devil Take the Hindmost,” Edward Chancellor
“The Bear Book,” John Rothchild
“On Money and Markets,” Henry Kaufman
“A History of Modern Europe,” John Merriman
“One World Divisible,” David Reynolds
“The American Century,” Harold Evans
Brian Trumbore
