So when we left, capitalism and democracy as drivers for freedom were as dug through and shot up as northern France. It was simply impossible to reconcile these philosophies as the optimal setting for everlasting peace when ten million boys lay dead in the mud of Europe’s battlefields. The vacuum of enlightened government was being filled with totalitarian philosophies. How did capitalism dust itself off and come back as a viable theory? Enter the life of John Maynard Keynes, the founder of macroeconomics, enlightened philosopher, and creator of the modern economy. The basis for fiscal and monetary policy, central banks, and exchange rates all come from Keynes. His life shows us the fatal flaws on the interwar period.
Keynes danced through Cambridge as one of its finest alumni, winning academic awards by the armful and being an esteemed patron of the arts. He hoarded knowledge and turned it into policy, writing papers and books that brought him to the attention of the British government. He worked in the government’s most prestigious offices, first the India Office as a bureaucrat then the British Treasury during World War I. While marshaling the British Empire’s resources for war, he became angry at what he saw as an enormous waste of money and men. He was furious that the politicians saw no other way through the mess than to pour more blood into the Marne.
His prominence to the British public came during the Versailles negotiations. He was so exasperated that he resigned his Treasury position and wrote a book called the Economic Consequences of the Peace, which is brilliant and scathing if you’ve ever read it. He could not believe that the Allies could not see that they would bear the major costs of the war, that wringing every last mark out of Germany while simultaneously demanding that the Germans rebuild their own country was pure folly. Keynes, as you might expect, was an arrogant bastard, so he thought he would use his new celebrity and his intellect to rebuild civilization from the ground up.
He spent the next fifteen years begging the British government to avoid disaster and failed miserably. He excoriated central bankers for caring more about restoring the gold standard than restoring trade. He tried to get politicians to care more about employment and stability than a return to pre-war standards. He did his best to get Britain to avoid the new gold standard and then to avoid an overvalued peg. He achieved none of these. Even after 1930, he failed to convince anyone that the Great Depression was a man-made catastrophe that could have been prevented by governments rather than caused by them (that job would be left to Milton Friedman).
His contributions wouldn’t be noted until the end of World War II. He left behind proposals for an international gold standard that would be the basis for the Bretton Woods agreement. He also had a hand in creating the World Bank and the IMF. His theories about fiscal policy would only be considered by America when it was a bankrupt country looking for a way to pay for a new war.