[Global Financial History] Keynes, Who Captured Mass Psychology, Changes Global Economic Policy

Baek Young-ran, Representative of History Journal

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In an era when the entire world was suffering from the Great Depression, British economist Keynes suddenly appeared on the global stage. Keynes, the official representative of the British Treasury, attended the Peace Conference held at the Palace of Versailles on the outskirts of Paris from January to June 1919. This outstanding 35-year-old economist had already been praised for his achievements regarding Indian currency and for managing British finances during the war.

In Paris, he participated in the Economic Committee and advised British Prime Minister David Lloyd George, but the crucial peace decisions were beyond his control. The actual decision-makers were President Wilson, Prime Minister Lloyd George, and French Prime Minister Georges Clemenceau. Germany, having already declared surrender, had no choice but to sign the treaty with the Allied Powers, officially ending the war. By the fall of 1918, German leaders had already realized that defeat in World War I was inevitable. After four years of horrific attrition warfare, Germany had no troops or resources left to resist the Allies.

The Allies received enormous support in manpower and materials from the United States. The German government requested the U.S. to mediate a ceasefire to prevent an Allied invasion of Germany. Earlier that year, Wilson had proclaimed the “Fourteen Points,” conditions aimed at establishing a “just and lasting peace” between Germany and its enemies. Germany requested a ceasefire based on these conditions, and the Allies guaranteed a fair and altruistic final peace treaty to Germany.

The armistice was signed and came into effect on November 11, 1918, finally ending the battles of World War I. At the Versailles Conference, Keynes published his book The Economic Consequences of the Peace. Keynes had already predicted that the Treaty of Versailles would give rise to the Nazi state. He was one of the most outspoken critics of the punitive treaty imposed on Germany.

In protest, he stormed out of the conference hall. Five months later, he published his book The Economic Consequences of the Peace. Keynes argued that the excessive war reparations and other harsh conditions imposed on Germany by the treaty would lead to the financial collapse of the country. This, in turn, would have serious economic and political repercussions for Europe and the world. Keynes wanted to prevent another war at all costs. The only thing he could do was to sincerely write his book. His book, resembling an economic paper, was unusually widely read.

In this book, Keynes made a grim prophecy especially relevant to the next generation of Europeans: “If we aim to impoverish Central Europe, we will face reactionary forces and desperate revolutionary situations,” and “If such a situation arises, whoever wins will destroy the civilization and progress of our generation.” He reasonably speculated that Germany might start another war for revenge.

Having experienced a bleak era, Keynes could not agree with Adam Smith’s claim that the market would balance itself through the invisible hand. Having seen human desires at their lowest, Keynes could no longer trust people or the market. Instead, Keynes argued that the market is inherently unstable. Production, prices, and employment inevitably fluctuate constantly. Therefore, the economy itself must have an ever-changing unstable nature. The economy inherently moves between boom and bust, growth and recession, and must be a changing entity.

Keynes stated that the Great Depression was not a random event. If the economy relies solely on the market’s autonomous adjustment ability, it will inevitably face another devastating recession at some point. He argued that the government must intervene in the essentially unstable market to create jobs and income. That is the lesson of the Great Depression.

After World War II ended, there was a power struggle between the U.S. and Britain over the future global economic system. When Britain abandoned the gold standard in 1931, economist Keynes dreamed of restoring Britain as a financial empire. His plan was to establish a global-scale super bank.

Keynes’s idea was born as the “Bank for International Settlements” (BIS). The BIS was an organization where policy officials from central banks of Europe, the U.S., and other countries gathered to coordinate policies. At that time, the BIS mainly functioned as a clearinghouse for international arrangements and reparations. Britain aimed to lead this. If successful as planned, all global trade, assets, and credit could be independent from governments and secretly controlled by a small group of powers.

In fact, the BIS, established in 1930 by Keynes’s close friend Norman, Governor of the Bank of England, was an independent and private organization. It had no obligations or responsibilities to governments. This was possible because of economist Keynes behind it. All institutional decisions of the BIS were Keynes’s ideas. Before the BIS’s birth, he sought to lay the foundation for a “supranational monetary institution.” The supranational institution Keynes referred to is the IMF. The IMF was originally created to complement the World Bank’s functions. The establishment of the World Bank and IMF was decided at the 1944 Bretton Woods Conference led by the U.S. Keynes, who became the first deputy governor of the World Bank, led that conference.

After World War II, Keynes attended the Bretton Woods Conference as the British representative and advocated for the introduction of a global currency, but the U.S., emerging as the hegemon, designated the dollar as the reserve currency. Keynes said economics deals with inner reflection and values. He also said economics deals with motives, expectations, and psychological uncertainty. Indeed, much of Keynesian economics concerns mass psychology. Behind his economic theories lies his own desires.

Baek Youngran, Representative of History Journal

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