1. John Maynard
Keynes:
Depression
Destroyer
A Look at the Contributions of the 20th
Century‟s Most Influential Economist
Presented by: Jeff Keele, Ph.D.

2. Economics in the
1930s
Great Depression
Dust Bowl
New Deal Policies
Keynesian Economics
 John Maynard Keynes
 1936

3. The Context:
Business Cycles and Depressions
Business Cycles
 Recurring booms and busts in economic
performance
 All economies face them
 Deep, long “busts” are called Depressions

4. Depression Cycles In
America
U.S. Depressions
 1819
 1836
 1857
 1873
 1893
 1921 (brief)
 1929 GREAT DEPRESSION
 None Since …
WHY???

5. Causes of the
GREAT DEPRESSION
Boom of the “Roaring Twenties”
Coolidge era policies favor
business and wealthy
Concentration of Wealth
increases
 Gap between rich and poor
expands
 National economy overly
dependant on conspicuous
consumption

6. Causes of the
GREAT DEPRESSION
Speculative run in the Stock Market
Margin trading
Leveraged purchases
 stocks bought with
borrowed money
Rampant, undisciplined
speculation
Stock prices unrealistically
high

7. Poor Business
Practices
Huge land
speculation
wave in Florida
 Resort developments multiply
 Shares hawked to cash-flush
banks, corporations, and wealthy individuals

8. Florida Land Bubble
Many bought on credit, most for speculation.
Land prices quadrupled
Huge paper profits for speculators
THEN…
Slowing economy led to a sell-off
 Falling prices created a credit crisis
 Credit crisis created a panic and collapse of the
whole Florida land market.
 Large investors lost enormous paper assets

9. Slowing Economy +
Florida Land Bubble Collapse
=
Stock Market Crisis
Stock market crash destroys paper wealth
 Stock values plummet
 Stock no longer covers collateral requirements
 Margin calls issued
Depositors try to withdraw cash to cover
margin calls on their stock

10. Stock Market Crisis 
Banking crisis
Banks unable to pay depositors
 Panic
 Runs on banks
 Large-scale bank failures
 Deposits uninsured
 Depositors lose

11. Depression Cycles
Downward
Newly wealthy now find themselves newly
poor
Consumer spending plummets – especially
for consumer luxuries
New orders dry up for producers
Producers lay off workers
Working classes lose income and decrease
spending

12. Depression
Cycles
Downward
Congress passes Smoot-Hawley Tariff Act
 Shuts off imports in an attempt to protect domestic
producers
 Foreign nations respond by shutting off American
imports
 Efficiency and wealth gained from world trade
evaporates

13. Government
Response
President Herbert Hoover
and US Government…??
Wait for the market to correct
itself
“Pump priming?”
well, maybe, but didn‟t DO it.
Dominant economic paradigm:
Laissez Faire
Government will just mess it up worse.
Let it fix itself.

14. Classical
Economic Theory
Adam Smith and the
Invisible Hand
Competition and profit
motive are core
Economies tend toward
efficient equilibrium when
left alone
Governments should not
meddle

15. Classical
Economic Theory
David Ricardo
Systematized Smith‟s work
Ricardian Equivalence:
Government spending can not stimulate
economic performance
Stimulation will be exactly counterbalanced:
 By offsetting taxes – if paid for by tax increases
 By offsetting savings – if paid for by government
debt

16. Enter:
John Maynard
Keynes
By 1930: Already the most
influential British economist
Prep School at Eton
 Gifted in math, classics and history
BA 1905, MA in 1909 at Kings
College, Cambridge
 Math first
 Economics – motivated by interest in politics

17. Keynes‟ Bio
Lectureship at Cambridge
WWI:
Worked for the Adviser to the Chancellor
of the Exchequer and Treasury
Financial representative for the Treasury
to the 1919 Paris Peace Conference

18. Keynes‟ Bio
Representative of Finance
Department at the Versailles
Peace Conference in 1919
 Argued against reparations
 They would crush Germany &
cause more conflict
Published:
The Economic Consequences of the Peace in 1919
A Tract on Monetary Reform in 1923
Treatise on Money in 1930

19. Keynes Bio
Published his magnum
opus, The General
Theory of
Employment, Interest
and Money, in 1936Classical Economics
Challenged core paradigm of
Markets may not always tend toward an equilibrium at
full employment
Government has a role in stimulating economic
performance – by stimulating demand

20. Keynes‟ Thesis
Depression could become
a long-term equilibrium
outcome
 Financial shocks and gloomy
expectations could
permanently suppress
aggregate expenditures
(demand)
 Large-scale unemployment -
both human and capital -
could result

21. Keynes‟ Thesis
Solution: Stimulate Aggregate
Expenditures
Only the government is capable of
sufficiently massive stimulation
Governments should SPEND their way
out of a depression
Counter-cyclical Fiscal Policy:
 Cut taxes and increase spending in
recession/depression
 Increase taxes and cut spending in times
of inflationary expansion

22. Keynes‟ Open Letter to
President Roosevelt
New York Times: December 31, 1933
“Broadly speaking, therefore, an increase of output can
occur only by the operation of one or other of three factors.”
…
•Individuals are induced to spend more (but they don’t have it)
•Business are induced to spend more by increasing their
capital and employment (but they have excess capacity and don’t
have existing orders to justify expansion)
or
•Government must “create additional current incomes
through the expenditure of borrowed or printed money.”

23. Keynes‟
Open Letter to
President
Roosevelt
… “Thus, as the prime mover in the first stage of the
technique of recovery, I lay overwhelming emphasis on the
increase of national purchasing power resulting
from governmental expenditure which is financed
by loans and is not merely a transfer through taxation
from existing incomes.”

24. Keynes‟
Open Letter to
President
Roosevelt
… "The setback American recovery experienced this past
autumn was the predictable consequence of the failure of
your administration to organize any material increase in
new loan expenditures during your first six months of office.
The position six months hence will depend entirely on
whether you have been laying the foundations for larger
expenditures in the future."

25. Roosevelt’s New
Deal policies fit
Keynes’
Suggestions:
Works Progress
Administration
Civilian Conservation
Corps

26. New Deal
Programs
Resettlement Administration
 Relocate families to new, planned communities
Farm Security Administration
 Rural rehabilitation
Rural Electrification Administration
 Charged to bring electricity to farms, etc.
Tennessee Valley Authority
 Flood control, electrification, fertilizers in Tennessee Valley

27. New Deal
& Keynesian Theory
Keynes‟ model Provided:
 Scientific justification for New Deal
 Theoretical guide for New Deal expansion
 Confidence that short-term deficits were OK
Fresno Auditorium Oakland-Alameda Bridge Imperial Canal, CA

28. More Keynes-compliant
Policies of the 30‟s
Unemployment benefits
Social Security Insurance
Progressive income taxes
All of theses are “automatic stabilizers”

29. More 1930s
Safeguards against
Economic
Depression
Federal Reserve Building,1937
FED: Federal Reserve Board strengthened
 Regulates banking practices and money supply
 Guards against bank failures and maintains a
stable money supply
FDIC: Federal Deposit Insurance Corporation
 Created to guarantee depositors money if banks
fail
 Works to maintain confidence and avoid financial
panics

30. More 1930s
Safeguards against
Economic Depression
SEC: Securities and Exchange
Commission strengthened to guard
against stock market collapse
 Tighter accounting and reporting practices
imposed on publicly traded corporations
 Limits placed on margin trading
 Strengthened controls on insider trading

31. More 1930s
Safeguards against
Economic Depression
Strengthened Labor laws
 Protect workers rights
 Improve distribution of income
 Avoid some of the income inequality that
made the „20s boom so volatile
 Maintain laborer income to maintain private
sector demand

32. Keynesian model‟s
successes
Less volatile business cycles
No major depression since
implementation
Greater economic security for working
classes
Political stability in advanced world
economies where Keynesian policies
are practiced

33. Keynesian model‟s
weaknesses
Inflationary tendency
 Government stimulation may cause inflation
 Keynes discounted this possibility for times of
deep recession/depression
Deficit spending
 Tax cuts and increased services are easy to sell to
voters in recessions
 Tax increases and reduced services are a hard
political sell for elected officials even in inflationary
expansions

34. Keynesian model‟s
weaknesses
Government deficits compete with private
investment for investment money
 Crowding out effect
 May reduce net private investment
Growing government sector
 Inconsistent with Lockean view of minimalist
government
 Government may become more intrusive

35. Contemporary
Macroeconomic
Theory and Practice
Dr. Ben
Bernake, FED
Keynesian Base: Chairman
 Automatic stabilizers well entrenched to
mellow out wide swings in the business
cycle
Monetarist Anti-inflation Program:
 Greenspan and now Bernake guarding
against inflation through cautious Monetary
policy

36. Contemporary
Dr.
Milton
Macroeconomic
Friedman
Theory and Practice
Supply Side theory focusing on tax incentives
for investment -- a la Milton Friedman
 Reduced tax burden -- to be balanced partially by
promised economic growth and partially by
reduced government spending
 Claimed as model for Reagan and G.W. Bush
administrations, but not really implemented
 Both cut taxes but failed to balance with reduced
spending – leading to large deficits that counteract the
expected benefits

37. Keynes Is Still Key
Despite important later
developments in theory and
practice …
 Monetarist theories
 Supply Side and Neo-Classical
theories
Contemporary Macroeconomic
theory and contemporary policy
are firmly grounded in Keynes‟
ideas from the 1930s.