During the 1920s, poverty was thought to be nearly extinct. By investing $15 a week in stock, a man could have a comfortable fortune in 10 to 20 years. Then, with the stock market crash of 1929, billions of dollars of wealth just 'disappeared' from the system. However, the signs had been noted beforehand: six years before the crash an average of two banks would fail each day. The 'great wealth' was heavily concentrated at the top, with the incomes of the wealthy roughly 630 times the income of the impoverished. The two million people unemployed were ignored by the system. Economists, however, ignored these signs, and declared that we were on a 'permanently high plateau'. Thus, Americans borrowed heavily to invest in the stock market and magnify their fortunes. With the crash, billions of dollars in paper fortunes were lost, and massive unemployment ensued.
After the stock market crashed, people lost faith in the system. A quarter of the workers were unemployed, and the average wage of those employed was less than 25 cents an hour. Banks failed. Residential construction nearly ceased altogether. Those that could still count on salaries and dividends watched them plummet downward. The economists couldn't understand why this long lasting depression was taking place. After all, according to previous theories, economic downswings would automatically 'cure themselves'.
It took a man as 'strange' as John Maynard Keynes to find a solution to the problem. Keynes was born in the year Karl Marx died, but carried the opposite outlook on life. While Marx was bitter and disappointed, Keynes led a life of buoyant enthusiasm.
Keynes also had a life filled with contradictions. He loved modern art and classic literature. He ran a theatre, and was director of the bank of England. He accumulated vast fortunes in risky ventures, yet his theories led to some of the largest government 'welfare' programs. His one regret in life was not drinking enough champagne. He had a noble lineage, and attended some of the finest schools in England - on scholarship. At Cambridge, he was sought out by Leonard Woolf and Lytton Strachey (his eventual lover) and became a member of their 'Bloomsbury group. He then took wanted to take on a challenge (working in the governments India office), hated it, and returned to Cambridge. (But, from his experience was acknowledged as an 'expert' on Indian currency.)
Back in England, he also became editor of the Economic Journal, and a 'member' of the Bloomsbury group. The group consisted of some of the greatest intellectuals of the time. It's approval could launch a writer's literary career. A disparaging evaluation could end a career before it started. In this group, Keynes was a key figure. He could talk to anyone about anything with complete assurance. With the onset of World War I, the Bloomsbury group was disrupted, and Keynes ingenuity shined elsewhere.
He helped the English National Gallery obtain expensive masterpieces at rock-bottom rates. At the wars conclusion, he represented the treasury at the peace conference. Alas, his position prohibited from interfering directly in the peace-making process, and he was unable to correct the great wrongs he saw. Therefore, he wrote a book, The Economic Consequences of the Peace, that would make is name be known worldwide. In it, he criticized the huge reparation required of Germany, and noted that they woul d in turn lead to depression, and the possibility of further uprising.
After the war, Keynes went to 'work', making a fortune in business by disregarding 'inside information'. He also married Lydia Lopokova, a beautiful ballerina, and published Tract on Monetary Reform in which he keenly noted, "in the long run, we all are dead." In 1930, he wrote Treatise on Money, a long work that attempted to explain why the economy rose and fell in cycles. The subject had been analyzed by many other economists who pointed to such phenomena as sunspots to explain the rise and fall of economic prosperity. Keynes, however, zoomed in on savings.
In the classic economics of Ricardo and Mill, only the rich had the capability to save, and their savings were generally put to immediate use in their own 'companies'. However, with time, business grew, and wealth became dispersed throughout the population. Soon, saving and investment became further and further separated, and were "separate operations carried out by separate groups of people." In a capitalistic economy, money flows from businesses to individuals in the form of wages, then back to the businesses as payment for goods and services. Leftover household income is in turn 'saved', and thus transferred back to businesses through such means as banks or bonds. However, businesses are not required to invest the savings. They will only use the savings if they are seeking to expand. Thus, if something 'scares' the businesses from expanding, the money will not be invested, and income will be 'lost' in the economic cycle. Thus, without "enterprising" business, individual "thrift" does nothing to help the economy.
Keynes theory explained how economic slumps could result, however, it failed to explain how long-lasting depressions could occur. 'Seesaw' economics dictated that a savings glut would produce lower interest rates that would in turn cause people to save less. Therefore, there must be something else that was holding the economy back. Keynes located the mysterious factor in his economic masterpiece, The General Theory of Employment, Interest, and Money. In it, Keynes stated that the economy didn't resemble a 'seesaw' as classic theory dictated, but instead was an elevator, capable of stopping at any level. His key observation was that once the economy reached bottom, individuals would have no excess income to save. Since there was no savings, there was in turn no money available for businesses to invest, and the economy couldn't rescue itself. Without the savings, there would be no pressure to lower interest rates, and in turn no pressure for businesses to investment. Just when the economy needed savings the most, individuals failed to provide it. The economy continued its downward spiral, and social misery appeared. Furthermore, investments were required the save the economy and provide more goods, but the businesses were unwilling to invest until the consumers were able to pay. Thus, the viscous cycle continued. Investment was an "undependable drive wheel for the economy," and when no new investment could be found, the economy began to falter.
To cure the economy, Keynes encouraged the government to "prime the pump" and spend money on projects that would in turn "[bolster] the nation's general buying power." Since business was unable to expand, the "government must take up its slack." With more people employed, savings would increase, in turn increasing investments. Keynes, however was far from advocating all-out government control of the economy (a la Marx). Instead, he had the utmost faith in capitalism, and saw increased government intervention as a temporary cure. Unfortunately, it didn't work. In the U.S., government spending rose, but not to the extent that Keynes demanded for full economic recovery. Furthermore, the Federal Reserve Board was afraid of inflation, and thus implemented policies that discouraged bank lending. Another reason for its failure was the businessmen themselves. Instead of interpreting the government intervention as a helping hand, they were threatened by the increased government activity. The "halfway measures" implemented by the government served more to frighten business than encourage them. "The medicine cured the patient of one illness, only to weaken him with its side effects."
It wasn't until World War II broke out that the economy rescued itself from the depression. And with the war came another Keynes book, How to Pay for the War. in the book, Keynes proposed compulsory savings: a portion of everyone's income would be automatically invested in government bonds. Then, when the war was over, and the economy was in dire need of savings, the certificates could be cashed. The plan, however, was too revolutionary for the government leaders. Keynes was too busy on other projects to be discouraged by its unacceptance. He proposed the IMF and International Bank "to act as guardians of the international flow of money." They would replace the "dog-eat-dog" system, and help nations facing economic difficulty.
In 1937, Keynes suffered a heart attack, but that did not deter him. He still was hard at work with the war effort, managing his theatre, and serving as director of the bank of England. After the war he served on the Board of Trustees of the National Gallery and negotiated loans to Britain. With all the his work for his country, it was only fitting that he be elevated to "Lord Keynes, Baron of Tilton." However, his constant drive to success took its toll, and in 1946 his life drew to a close, leaving behind one of the world's greatest economists.