Keynes and economic cycles

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Transcript Keynes and economic cycles

The Roaring Twenties
Growth and Good Times
The Dirty Thirties
The Great Depression
 This presentation will discuss:
 The historical background to modern globalization
 Keynes’s responses and proposed solutions
 The Bretton Woods Conference
 The gold standard monetary system,
 The World Bank, International Monetary Fund, General
Agreement on Trade and Tariffs, G7, G8, and G20.
 MHR, pages 226-231
 Oxford, pages 209-268
“Capitalism is the extraordinary belief that the nastiest of
men, for the nastiest of reasons, will somehow work for
the benefit of us all." - John Maynard Keynes
“…never forget that just because a man may be poorer
than I am, he is no less a man, with no less a right to his
dignity…” - David Weber, By Schism Rent Asunder,
Tor Books, 2008.
 The 1920’s were a period of economic “boom” in the
United States and the world.
 The boom was based on innovation, expanded
production for personal consumption, and
mechanization in the work place; for example, the
development of the assembly line.
 The development of electrical power encouraged
production of electrically powered tools
and appliances.
 The stock market was booming, and some people
became very rich.
 The capitalist economy was at the peak of its economic
 The stock market collapsed as share values dropped to
record lows.
 This collapse triggered bank failure and the world
entered the period known as the Great Depression.
 The 10-year economic depression ended only with the
outbreak of World War II.
 The stock market collapse and the failure of many banks
caused the loss of life savings for many people.
 The means to recover under capitalism was missing for
all but the very rich.
 People had little money to invest so businesses needing
capital suffered.
 Nations chose to restrict trade to protect their
economies by imposing protective tariffs.
 This backfired.
 High unemployment occurred world wide.
 The world’s economic systems totally failed.
 The capitalist economy entered a severe downward
spiral in its cycle.
 Was the capitalist, market system doomed to failure?
 Should it be replaced by a centrally planned system?
 What changes could or should be made to change the
 “Boom and bust” refers to the movement of an
economy through economic cycles due to changes
in demand.
 During booms, there is high demand, increased
inflation, unemployment falls, and national income
 During busts or recessions, there is low demand,
inflation decreases, unemployment rises, and national
income falls.
 Keynes argued that his system would help to stabilize
world economic systems, prevent recessions, and
effectively enable world monetary processes that
would prevent economic problems.
 Keynes argued that when the capitalist economy was
in a bust part of the cycle, it was up to the government
to intervene.
 The state could get an economy out of a recession or
depression by creating policies and programs that
would increase the demand for goods and services.
 He believed that the economy needed production and
consumption to aid recovery from busts.
 Because so many had lost their jobs (28%
unemployment by 1933 in U.S.) and could not spend to
increase demand, it was up to the government to
stimulate the economy.
 During a bust, the government, even if it has to borrow
to do so, should finance “big ticket” projects such as
roads, dams, buildings and more.
 Many western governments adopted some of Keynes's
ideas after World War II.
 In Canada the Lions Gate Bridge, the Ice Fields
Parkway, and Miette Hot Springs are examples of this
belief in governments taking action.
 A good site to research more projects is
 The 1933 Emergency Banking Act signaled the start of
the end of classic capitalism.
 The government ventured into business regulation by
making the banking industry meet standards to
protect the average depositors from the catastrophic
loss of deposits.
 The Tennessee Valley Authority, hydroelectric dams,
schools, courthouses, town and city halls (WPA), parks
and environmental cleanups (CCC) were some of the
projects American governments undertook.
 They provided temporary jobs and new infrastructure
and helped many people and communities survive the
 Keynes argued that government activity of this type
would increase the demand for workers, which would
increase spending, because the workers would have
money for more than just basic necessities.
 This would increase the demand for goods and
services and the economy would grow.
 Both the state and the private sector play an important
role in the economy of a nation in a mixed economy.
 The state should institute fiscal and monetary policies
to enable and sustain economic growth, according to
 Fiscal refers to the income and expenditure of a
nation, commonly called a budget.
 Fiscal policy includes:
 spending priorities
 specific projects
 levels of taxation
 Monetary policy determines a nation’s supply
of money.
 The Federal Reserve Bank and Bank of Canada were
given the task of controlling the supply of money by
raising or lowering interest rates.
 Lower interest rates should promote growth while
higher rates should slow growth.
 In the 1930’s, governments imposed tariffs. This caused
a reduction in trade.
 Tariffs were an attempt to protect their economies
during the Depression and post-war world.
 Many will argue that World War II brought the world
out of the Depression, but did it solve the world’s
economic problems?
 As the war drew to an end, new concerns surfaced.
 The Bretton Woods Conference attempted to create a
plan to face these challenges.
 Took place in July 1944.
 Goal was to create a new framework for the global
economy after the war.
 A stable, cooperative monetary system that was
 International
 Would prevent future monetary crises
 Would preserve and protect national sovereignty
 Keynes influenced many of the decisions made at
Bretton Woods.
 Hayek distrusted government planning and control
and opposed Keynes.
 Friedman was an early supporter of Keynes who
changed his views to call for unfettered capitalism,
featuring very little government involvement.
 Friedman was an advisor to Ronald Reagan and his
suggestions formed the basis for the neoconservative
economic movement from the 1970’s to the present.
 Money is a medium of exchange that does away with
the barter system.
 A currency—including shells, paper, coins, playing
cards, or anything that is deemed to be acceptable as a
medium of exchange in a society—can be called
 About 8,000 years ago, precious metals, silver and gold
began to be used as money. These metals
were valued because they were scarce, strong
and durable.
 First use of engraved metal coins occurred in ancient
Samaria, Egypt, and Turkey.
 Coins were of a predetermined weight.
 Common forms of cheating on the value of a coin
included shorting, clipping, shaving, and hollowing.
 The gold standard was used to try to create a common
currency in the 1700’s.
 Runaway inflation was reduced but influxes of “prize
money” disrupted the first try.
 National monetary policies were not possible and
could not be used to control the supply of money.
 Paper money is easier and cheaper to create.
 It has no real value other than convention.
 First use was probably in China, about 3,000
years ago.
 By 1600, bank exchange receipts were
commonly used.
 In 1685, colonial Canada used playing cards due to
shortage of coins, but this practice didn’t last long for
obvious reasons.
 Great Depression – the economic collapse and lack of
ability to recover triggered the demand for each
country to have a monetary policy to try to solve the
problems of inflation and other economic woes.
 Each country wanted to devalue its currency to gain a
trade advantage.
 This caused many nations to abandon the
gold standard.
 Keynes argued for a world “reserve currency” to be
administered by a World Central Bank.
 He lost.
 He argued for fixed exchange rates.
 The American dollar became the international base
currency and the price of gold was fixed at $35.00 per
 Keynes envisioned an international currency which
could be used to maintain a healthy world economy,
but his proposals were rejected due to strong
American opposition.
 At Bretton Woods, countries agreed to
another approach.
 International agencies like the International Monetary
Fund (IMF) would work to help standardize currency
 The IMF exists to “Facilitate the expansion and
balanced growth of international trade and contribute
to the promotion and maintenance of high levels of
employment and real income.”
 The IMF is expected to oversee a system of “fixed”
exchange rates to prevent devaluing of a currency to
gain trade advantages.
 The IMF was expected to promote currency “convertibility”
by making it easier to convert or exchange one currency for
another when trading.
 The IMF was to serve as a lender of “last resort” to help
countries with cash flow problems. These loans, however,
come with conditions the country must follow.
 The IMF currently describes itself as “an organization of
187 countries (July 2010), working to foster global monetary
cooperation, secure financial stability, facilitate
international trade, promote high employment and
sustainable economic growth, and reduce poverty.”
 International Bank for Reconstruction and
 To provide low interest loans to help rebuild after
World War II.
 To provide low interest loans to help countries
 In the 1950s, the World Bank began to provide very low
or no interest loans to help build infrastructure to
Third World countries.
 This was designed to prevent poor countries from
setting up a funding organization separate from the
Bretton Woods Agreement.
 The poorest countries were unable to repay the loans
and fell into default.
 GATT was set up to establish rules to govern global
trade and to reduce national trade barriers and stop
protectionist tariffs.
 Governed by consensus.
 Seven rounds of tariff reductions took place, the last in
1986 in Uruguay.
 The WTO replaced GATT in 1994.
 Introduced the General Agreement on Trade in
Services, which includes telecommunications,
banking, investment, transportation, education,
health, and the environment.
 Currently the WTO has 153 member nations.
 Its founding and ongoing purpose is to supervise and
liberalize international trade.
 Critics are wary of the new Dispute Settlement Body,
which gives the WTO the legal tools to approve tough
trade sanctions by one member against another,
especially on nations which might disagree with the
WTO’s interpretation of global trade rules.
 Any member country, acting on behalf of a business,
can challenge the laws and regulations of another
country on the grounds that they violate WTO rules.
 All nations have the right to use the Dispute
Settlement Body to pursue their own economic selfinterest.
 The world's major trading nations are also the most
powerful economic actors in the WTO. The tendency
is for the strong (rich) nations to use the rulings of the
WTO to dominate the weaker (poorer) countries.
 The 'national treatment clause' says that a country may
not discriminate against products of foreign origin on
any grounds.
 This removes the power of national governments to
develop economic policy which serves the moral,
ethical, or economic interests of their citizenry.
 Powerful nations tend to use this process to dominate
weaker nations.
 Under the terms of the Clause, nations may not
boycott goods that are:
 produced by children in sweatshop conditions
 made in a factory that fouls the air or poisons the water
 produced by workers paid poverty wages
 are poisonous or dangerous
 According to WTO rules, any country that refuses to
import a product on the grounds that it may harm
public health or damage the environment must prove
the case scientifically.
 WTO rules on disputes over:
 The sale of products such as Canadian asbestos
 U.S. hormone fed beef
 American tariffs on mustard and pork
 Whether Canada Post unfairly subsidizes parcels and is
therefore “poaching” potential customers from UPS
 The biggest banks, corporations and businesses argued
that a deregulated, privatized, corporate-led free
market will solve all of the problems of humanity.
 The proof for that claim is elusive.
 Will the biggest of banks, corporations, and businesses
work for humanity or their own
profit line?
 In the 1950’s and 1960’s, there were indications that the
goals of Bretton Woods were not being achieved.
 In some cases, the goals being achieved were not the goals
advocated by the original participants.
 The continuing issues included:
 unfair trade pricing and practices
 difficulty dealing with powerful transnational corporations
 difficulty dealing with self interested national governments
 stagflation
 runaway inflation
 Many problems arose in the 1970’s and 1980’s that
identified inequities between countries, but they had
little power to resolve them effectively.
 This appeared to suit the heavily industrialized nations.
 Many Third World nations found themselves going
into heavy debt as they tried to modernize.
 They often found that imported product prices rose
steadily, while the raw material prices for what they
produced dropped.
 Developing countries tried to form producer cartels to
drive up prices but faced stiff opposition by
transnational corporations.
 When developing countries planned greater
government involvement in the economy, this was
opposed by the IMF and WTO.
 When developing countries planned to regulate
foreign investment and impose some trade
restrictions, this was opposed by the IMF and WTO.
 The Group of Seven (G7) was an unofficial forum which
brought together the heads of the richest industrialized
In 1997, Russia joined the G7, creating the The Group of
Eight (G8). The European Union is also represented.
The Group of Twenty (G20), established in 1999, brings
Finance Ministers and Central Bank Governors together to
discuss key issues in the global economy.
Canada is a member of the G8 and the G20.
How is it to Canada’s advantage to belong to
these groups?
How could it be disadvantageous to Canada?
 Did the Bretton Woods Conference succeed?
 Did the institutions set up as a result of the conference
achieve their intended results?
 If so, to what extent?
 If so, to whose benefit?
 If not, to whose detriment?
 Were changes to the plans needed immediately?
 What further changes are needed today?