John Maynard Keynes, born June 5th, 1883, in Cambridge, England, was the preeminent figure in twentieth-century economic thought. His influential theories ushered in a new era of analysis and policy, and an entire branch of economics is named for him – Keynesianism – which has served as a yardstick for modern economists.
In 1905, Keynes earned a degree in mathematics at King's College in Cambridge. He then focused his attention on economics, remaining at the school to study the subject. Leaving Cambridge, Keynes took a position with the British civil service, where he collected the material for his first book, Indian Currency and Finance, which described the workings of India's monetary system.
In 1908 Keynes returned to Cambridge as a lecturer and a few years later became editor of Economic Journal – Britain's foremost publication on economics. In 1915, Keynes was offered a job at the British Treasury and became its chief representative at the 1919 Versailles peace conference, following the First World War. Upon returning to England, Keynes resigned his post with the Treasury, complaining that the amount of money the Allies had demanded from Germany for war reparations was vindictive and unjust. Subsequently, Keynes wrote The Economic Consequences of the Peace, which elucidated through insightful analysis his opposition to the Versailles Treaty, correctly predicting how the onerous reparations required of Germany would lead to future economic collapse, nationalism, and militarism.
Like most economists of the 1920s, Keynes was an advocate of the quantity theory of money, known today as 'monetarism'. He agreed that price levels should be stabilized through interest rates set by a government's Central Bank: to guide its national economy, the Bank would lower interest rates when prices rise, and raise them when prices fall. After the global depression struck in 1929, however, Keynes investigated why the classical approach had failed to prevent this new economic crisis, and offered his conclusions in the seminal book, The General Theory of Employment, Interest and Money.
Often considered Keynes' magnum opus, The General Theory marks the birth of modern macroeconomics. It not only transformed the academic world of economics, but also the practical world of economic decision-making. The book signified a major philosophical departure from neoclassical economics – the branch of economics which Keynes eventually viewed as inadequate and detrimental to the solution of financial and social problems. Keynes comprehensively challenged the conservative policies of the day, demonstrating that without self-corrective market mechanisms to lift an economy out of prolonged depression, government intervention was necessary during severe economic downturns. Keynes proposed that to generate full employment, a government should run a deficit when its economy is slowing, since the private sector would likely be discouraged from spending enough to stimulate the economy in the face of a severe downturn. Once full employment is achieved through government stimulation and business is again flourishing, Keynes explained, the market mechanism could then function freely and the government should withdraw from the economy during the ensuing boom years.
In 1938, Keynes' theories were legitimated when President Franklin D. Roosevelt used them to rescue the United States from the Great Depression – a US Government program that spent five billion dollars to increase mass purchasing power in the US. The stimulus yielded results, although it was America's entry into the Second World War and its subsequent deficit spending that finally ended the economic crisis and pulled the nation out of the Great Depression. Nonetheless, Keynes' theory worked just as predicted.
As the Second World War raged on, Keynes contemplated a new international economic framework to avoid the dangers inherent in prewar economic policies. In July 1944, delegates from 44 nations gathered at Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. To guide these monetary discussions, Keynes drafted a proposal for the British Treasury and Harry Dexter White wrote a U.S. Treasury proposal – rival plans that embraced divergent philosophies. Keynes envisaged an International Clearing Union that would create trade equilibrium between countries. Under Keynes' plan, nations with trade deficits could increase their exports to trade surplus nations, and vice versa, through a world reserve currency administered by an international central bank. The United States rejected this idea. As the world's largest trade surplus nation, America anticipated a major advantage in establishing the dollar as the world's principal reserve currency in the postwar economy.
A major component of the Bretton Woods Conference that Keynes initially opposed was the utilization of a Gold Standard to maintain the exchange rates of national currencies. Keynes reasoned that international gold valuation should not be used to set currency exchange rates because this would seriously restrict the flexibility of a government to increase its money supply, and too high a conversion rate could lead to monetary collapse. Keynes' fears were well founded. Since 1971, when the Nixon administration abandoned the international gold standard because there was not enough of the precious metal in American vaults to support the value of the dollar, the deregulation of the international monetary system has led to a destabilizing era of floating exchange rates and financial volatility. In sum, what emerged at Bretton Woods mainly reflected the plan preferred by the United States, and the two institutions established to oversee the new international monetary system, the International Monetary Fund (IMF) and the World Bank (IBRD), were created without many of the self-adjusting features that Keynes had initially outlined in his plan for an International Clearing Union.
On Easter, April 21, 1946, John Maynard Keynes died at age 62, having suffered for many years from heart problems. The enormous influence of his life and work influenced twentieth century economics and continues to affect the present day. Although Keynes was a prolific writer, penning hundreds of articles and editorials, he is best known for his economic analyses of the First World War, the Great Depression, and the Second World War, which established Keynes' reputation as an intellectual giant among his contemporaries. The philosopher Bertrand Russell described Keynes as having "the sharpest and clearest" mind he had ever encountered, stating that, "When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool".