Keys to the Keynes

            When one examines history from the current day, a much clearer picture emerges. If hindsight is 20/20, then examining the past from the present can provide an even clearer picture. The Great Depression struck every American home. Over the years, experts have provided insights into the causes, impacts, and resolutions of that event. This post explores the causes, impacts, and resolutions of the Great Depression through the lens of John Maynard Keynes’ theory of aggregate demand.

 In his 1936 book, The General Theory of Employment, Interest, and Money, Keynes explains his theory of aggregate demand. The economic theory of Keynes, often referred to as Keynesian economics, offers an interesting approach to understanding economic activity. Keynesian economics argues that the total spending in an economy is the primary driver of economic activity and employment. If the aggregate demand is insufficient, economic downturns and unemployment are inevitable. Keynes found that during the periods of economic downturns, the government must intervene to boost the demand. He wrote that increasing government spending and lowering taxes stimulates the economy and creates jobs. Keynes suggested fiscal policies to ensure the management of economic fluctuations. Meaning during periods of inflation the government should reduce its spending and increase taxes. Conversely, during periods of recessions the government should increase its spending and reduce taxes. Keynesian economics focuses on the short-term fluctuations in the economy. Keynes found that people preferred to hold their money in times of uncertainty and this preference impacts interest rates and investment risk tolerance. Keynesian economic theory claims government intervention helps manage economic cycles by influencing the aggregate demand when the private sector is deficient.

The Great Depression began with the stock market crash of October 1929. This profound global economic downturn carried on throughout the 1930s. According to Keynesian economics, one of the primary causes of the great depression rests in aggregate demand. Keynes states the aggregate demand collapsed. He found the Stock Market Crash of 1929, the failure of the banks, and the collapse of global trade all led to depression that occurred.

The Stock Market Crash of 1929 crushed consumer confidence. Assets plunged. Every citizen felt severe financial loss. Banks failed. The loss of consumer confidence and risk aversion caused citizens to withdraw their funds from banks and the money supply evaporated. Government implementation of protectionists policies caused retaliation and decline in international trade. This caused further decline in aggregate demand and intensified the worldwide impact of the Great Depression.

While historians debate the actual end date of the Great Depression, it lasted for years and left a lasting impact. The Great Depression did not disappear overnight, and it was not cured with one solution. However, Keynesian economic theories certainly helped bring about its resolution. The adoption of Keynesian principles brought policy changes aimed specifically at aggregate demand.

Under the guidance of President Franklin D. Roosevelt, the government implemented programs and policies aimed at getting America back on its feet again. Better known as the New Deal, the FDR programs sought to return relief, recovery, and reform across the nation. With this New Deal, America develops Social Security, public works projects, and much more. Each program assists a different sector of the nation and assists in the recovery. The Federal Reserve fights the Great Depression by increasing the money supply and lowering the interest rates. World War II provides an impact never witnessed in history. The war efforts led to massive increases in government spending. Industrial production skyrockets as every American answered the call to support the troops.

In his article, Robert Samuelson finds that one can use the theories of Keynes, but explaining the causes and resolutions of the Great Depression requires more than one theorist to be applied. He writes one must use a combination of theories. He writes that if one follows Keynes, one can support the aggregate demand theory.[1] He found Keynes’ theory to be general and that, “It lacked a detailed explanation of the Depression itself.”[2] Samuelson writes that one must also use a list of other theorists to achieve a holistic approach to understanding. He finds each theorist brings a valid insight into the causes, impacts, and resolutions of the Great Depression.

In his article, Michael A. Bernstein writes that Keynes theories have been shaken by more current explorations. He finds that Keynes and his theories brought hope to a postwar community. The Great Depression stripped hope away. The body count and destruction of World War II blew the rest of the hope away because citizens feared the depression would return with the war’s end. Keynesian economics provided hope through explanations and a plan to move forward in time where people needed a clear path toward progress. He finds that although some historians claim, “Keynes is dead,” he states that Keynes and his theories are valid and worth crediting.[3]

In Keynes’ book, The General Theory of Employment, Interest, and Money, one can see how he provided hope in a time that desperately needed it. Keynes opines what happened and what can be done going forward to mitigate the same occurrences as they arise. He writes that as time goes by and if the market adjusts itself to the new demands in the capital-good industry, the market will restore itself.[4] He provided an answer that made sense and gave hope to so many people who were desperate to cling to any shred of hope they could find. Not only did he provide hope, but Keynes also possessed a charismatic way of writing in his book. His charisma provided the comfort needed. His explanation is clear and provided resolution for many people. He published his book at a time when people needed an explanation. Keynes was in the right place at the right time.

When applying the Keynesian economic theory to the Great Depression, one can better understand the factors that led to the disaster. The collapse in aggregate demand exacerbated by financial insecurity, global trade issues, and policy errors created a perfect storm followed by years of suffering. The subsequent resolutions to the Great Depression derived from refocusing on stimulating aggregate demand. The New Deal, the Federal Reserve, and World War II combined to lift the blanket of depression. Certainly, the Keynesian economic theories offer an outline for analyzation of both the causes and the resolutions.

 

 

Resources:

Bernstein, Michael A. “The Great Depression as Historical Problem.” OAH Magazine of History 16, no. 1 (2001): 3–10. http://www.jstor.org/stable/25163480.

Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Cham, Switzerland: Palgrave Macmillan, 2018.

Samuelson, Robert J. “Revisiting the Great Depression.” The Wilson Quarterly (1976-) 36, no. 1 (2012): 36–43. http://www.jstor.org/stable/41484425.

 

 

---

[1] Robert J. Samuelson, “Revisiting the Great Depression,” The Wilson Quarterly (1976-) 36, no. 1 (2012): 41.

[2] Ibid., 39.

[3] Michael A. Bernstein, “The Great Depression as Historical Problem.” OAH Magazine of History 16, no. 1 (2001): 3.

[4] John Maynard Keynes, The General Theory of Employment, Interest, and Money, (Cham, Switzerland: Palgrave Macmillan, 2018), 110.