The Price of Peace is a tome about John Maynard Keynes and his intellectual influence on macroeconomics and the world. Clocking in at 656 pages, it is one of the longest book I’ve read in a while; and took me longer to write something about due to my unfamiliarity with the subject matter.
Thus I must first profess my ignorance: my familiarity with Keynes is primarily in seeing his name used derogatorily. I have broad but shallow knowledge of the historical events in the 20th century. The Price of Peace fleshes much of this out, as the author Zachary Carter dives head first into primary and secondary sources to tell the stories from both the private and public life of one of the most important and influential figures in modern economics and capitalism.
The book begins with a silhouette of John Maynard Keynes, then a young unaccomplished academic, responding to a call from the British government to tackle the economic issues surrounding the Great War. He then played a major diplomatic role in the events surrounding the Treaty of Versailles which he disagreed vehemently with and leading him to go on a self imposed exile from governmental duties. As an outsider, he remained an influential public figure and through the Great Depression era wrote his magnum opus The General Theory of Employment, Interest and Money, culminating eventually with his work in the international delegate post world war 2 and his death shortly after the Bretton Woods Conference. The last third of the book focuses on the reverberations of his ideas, especially in the United States where it was both taken up and pitted against. I will note here that many of these economical concepts have taken root within the different political movements; the author has a decidedly favorable opinion of what Keynes’s ideas represent and stands for.
It is an all encompassing book, with many plots and subplots to pick at. For me personally, it was useful to see the circumstances that shaped these ideas that came to define so much of modern life. This article discusses a few moments that stood out to me among the rich tapestry of details. And lastly, startlingly, having grown up in a former British Colony, read about the demise of the empire with a fresh lens.
When I learned about the first world war in school, it was often about the assassination of the archduke amidst the political machinations of the western European nations. These nations have gained mass riches, large colonies, a strong military, and an appetite for conflict that has accumulated over the past few centuries.
The first world war also set the stage for the debut of John Maynard Keynes. The role that he played within the government during the time period and the economic circumstances deeply influenced and shaped his ideas and economic theories. Just as Keynes was undoubtedly clear eyed about the political tinderbox, it was also evident to him that all the warring nations had a symbiotic and interdependent economic relationship.
Prior to the Great War, London was the global financial center and clearing house where all nations stored gold to trade with one another. As the threat of war started to materialize, individual countries started to withdraw their gold reserves to meet their war obligations. Money was tied to real bars of gold then. As the physical shipment of gold were delayed or impeded by the wartime conditions, it created an insolvency situation because the clearing houses were physically unable to settle trades. This lack of liquidity was further exacerbated by a panicked public doing a bank run in fear of their assets.
The British political leadership had to act. The economic team, of which Keynes was a fresh member, drafted a plan for a new currency that would replace gold inside Britain. It was a radical idea and a gamble; while the British Pound Sterling is still guaranteed by gold bars, the currency could not be used to redeem for gold internally for the most part. The physical gold bars that were left in the vaults were then reserved for international trade settlements.
The plan worked. Even when war raged on the financial crisis was staved. The insight here was that while gold underwrites the value of currency, it was trust in the institution that enabled liquidity. By creating a way to honor both internal and global obligations they were able to reverse the bank run and restore trust.
In Carter’s retelling, this first salvo led Keynes down the path of advocating against the gold standard, which was unthinkable at that point in time. He started to formulate ideas which eventually led to him writing The Economic Consequences of the Peace. The box was opened.
Every nation who participated in the first world war ended up with massive debts from funding conflict. Over the period of 1914-1919, British debt exploded 10-fold with the United States as the main creditor.
The war ended with Germany still sovereign. To formally resolve the conflict, the countries had to come together through treaty and settle scores. The Allied nations that were victorious had both the political and military upper hand and they were not shy about using that to extract massive reparations from the losing party. The Treaty of Versailles concluded with Germany owing reparations of approximately 132 billion gold Marks, which was at first glance a multiple of what the war beaten economy was even capable of at that time.
Keynes came out strongly against the resolution, and resigned his government position in protest. “Germany will not be able to formulate correct policy if it cannot finance itself,” he said. Instead, Keynes wanted a credit program for Germany that the least scathed party, the United States, would finance which did not come to pass.
It was a contrast of styles. What got enacted was a zero sum game where victors were able to impose a significant burden for their political and economical gain onto the losers. Even as Historians continue to debate the merits of the Treaty of Versailles, coming out both for and against Keynes proposal, most would agree that the terms ultimately led to the conditions that enabled the rise of Hitler and the ensuing war.
With Keynes proposal, Germany would be able to sell bonds and use the proceeds to both finance reparations and stimulate the economy. The reparations will lead to money being paid Britain and France, which can then pay off debt and stimulate their economy. By being the ultimate lender, the United States would be able to eventually both profit off the money flow and rebuild Europe from the war. With no way of proving this counterfactual, in theory at least, this arrangement creates a virtuous cycle of putting money to work. With the important caveat of it being both politically and financially unpopular, and one which the Americans were ultimately unable to bear.
This speaks to both the support and critique that people have of Keynesian economics: Keynes believes that monetary intervention by government (through debt, bonds, etc.) is an effective means to induce demand and generate positive outcomes. His critics however argues that the artificial intervention is reckless, inflationary, and will lead to mismanagement and disastrous outcomes.
John Maynard Keynes died in 1946, shortly after the Bretton Woods conference. He represented Britain, once again, in her post war diplomacy efforts. Even as a party of Allied victory, the war debt incurred by the British were astronomical by any standard. And as the United States was their primary creditor, it also meant that they had to cede ground to American demands. Across the financial toll of the two wars, the conference saw British hegemony give way to a new era of American superpower.
Even in his death, Keynesian ideas loomed large and shaped the next twenty years of British politics. The welfare state became a rallying cry for those seeking to rebuild, and government led spending became the tool. The nationalization of public utilities and major industries, the National Parks system, and the National Health Systems were all initiatives from this time.
Even as Britain rebuilt from within, the empire’s external grip was weakening. Colonies sought independence from British control through a challenge on both fronts of moral authority and economics. Of the former, the perception of British superiority–in whatever rationale–was thoroughly shattered by the war. People were convinced that colonial rule were incompatible with the cries of democracy and the enlightened liberal as wielded as a rhetorical tool against fascism.
With the latter, Britain was in financial dire straights. After all, it is expensive to maintain colonies, and Britain no longer had the financial muscle to assert control in the face of local discontent. As the Suez Crisis demonstrated, the era of British rule is over.
I have always wondered about the collapse of the British Empire, gloriously accumulated across centuries, abruptly right around the end of WW2. It was difficult to imagine an empire built on ships, steel and gunpowder would yield because of the goodness of their hearts. As it turns out, the era of colonies gave way to finance.
There is a certain irony here. Keynes was right that the key to British hegemony do lie in her ability to foster trust and knit trade within the international community. The world wars were ultimately pyrrhic; Britain may have “won” both, but they lost everything else. Even the generation’s greatest economist couldn’t help here.
The final arc of the book traces Keynes’s influence crossing the Atlantic to the United States. This story is told through his numerous advocates, such as his protégé John Kenneth Galbraith, and their place within the various administrations.
This is when the book, without its main protagonist and mouthpiece, starts feeling unfocused. This is in part due to the difficulty of each actor living up to the literarily flamboyant Keynes himself, and in part the difficulty in following both the dispersion and evolution of his ideas, and the political chess moves played between competing ideas and factions. Incidentally, revisiting the discussions of that era came close to home; much that were debated then are not that different from issues that we face today circa 2021.
The author Carter managed to pull together a remarkably accessible account of the life and ideas of one of the most influential figures in 20th century economics. It provided me significant color on one of the more reductive terms in modern economics and political discourse, and context to the situation and man behind the ideas.
Keynes is often portrayed as a full throated advocate for government program. A socialist, if you will. But as with much of life, this is hardly the full picture: John Maynard Keynes is remarkably thoughtful about wielding economic interventions by governments. He regards it as a blunt tool that is necessary in extraordinary circumstances, which he lived through. After all, his key insight here is that money is more than just a store of value. It is a currency of trust that, when wielded correctly, alleviates suffering and ignites human flourishing.