In 1919 Keynes resigned from the British team at the peace conference that ended the First World War. Why?
Keynes judged the reparations demanded from Germany too heavy ever to be paid. He resigned and wrote The Economic Consequences of the Peace.
- Lived
- Born 5 June 1883 in Cambridge, England; died in April 1946 at Firle, Sussex
- Nationality
- British
- Work
- The India Office; lecturer at Cambridge and fellow of King's College; the Treasury in both world wars; a leading British figure at Bretton Woods in 1944
- Key works
- The Economic Consequences of the Peace (1919), A Tract on Monetary Reform (1923), A Treatise on Money (1930), The General Theory of Employment, Interest and Money (1936), How to Pay for the War (1940)
- School
- Keynesian economics, which grew from The General Theory
What Keynes was reacting to
Two shocks shaped his work. The first was the peace after the First World War. Keynes went to the Versailles conference in 1919 as the Treasury's representative. He judged the reparations, the payments demanded from Germany, far too heavy and resigned.
The second was the long spell of high unemployment in Britain between the wars. In the 1920s Keynes still worked within the quantity theory of money, which links the price level to the amount of money. Persistent unemployment led him to The General Theory.
Keynes's key ideas
Can you name Keynes's four key ideas, from 1919 to 1936?
Keynes argued that the sums demanded from Germany were unlikely ever to be paid, and that pressing for them would hold back Europe's recovery.
Can you think of an example?
Germany was a major customer and supplier for its neighbours. On this view, a Germany ruined to meet the bill would cost them sales too.
In A Tract on Monetary Reform, Keynes argued that the central bank should set interest rates to keep the price level stable. In 1925 he opposed Britain's return to gold at the pre-war rate of $4.86.
Can you think of an example?
Prices start to fall. The central bank cuts interest rates to steady them.
Total spending in the economy: consumption, investment and government spending. In The General Theory, Keynes argued that it sets output and jobs, and that an economy can settle with many people out of work.
Can you think of an example?
Factories stand half idle and people want jobs, yet firms will not hire because they cannot sell more.
The wish to hold wealth as money, such as cash or bank deposits, instead of less liquid assets such as bonds. At very low interest rates, he argued, extra money tends to be held instead of invested.
Can you think of an example?
Keynes gave three reasons to hold money: everyday purchases, a reserve for the unexpected, and readiness to profit from market moves.