Emergence of Keynesian Economics

 Let’s see about different schools of economic thought…

 

Queen Victoria of England was known as Grandmother of Europe. Her family had marriage relationships with other European countries' Monarchs. Queen Victoria , Kaiser Wilhelm of Germany and Tsar Nicholas II of Russia were relatives. But that couldn't prevent them fighting the World War I, and causing a massive destruction.

 

After WW-I , the late entrant in the war, USA emerged economically stronger. In the post-war period, what is known as roaring twenties, Ford implemented the Assembly line mechanism to improve productivity and to cut the price of his cars. In this ,workers made to do single type of work and products move from one stage to another along the assembly line. (Charlie Chaplin made fun of this in Modern Times ) The increased productivity pushed prices down and many were buying cars ; roads had to be built for cars, which created a lot of well-connected suburbs. The car industry itself was dependant on Rubber and Glass industry, so they were also doing well. The EMI system made many could afford consumer durables easily. Republican Presidents increased import duty to help domestic industry.

 

The stock market went crazy. There were leveraged speculative position which drove the stock market higher. US was agricultural based economy then, with 60 percent of population were dependant on agriculture sector. Though industry was doing well, Farmers didn't do well. They could produce more due to technology improvement , but due to excessive supply, farmers could not make good money. Sixty percent of Americans were under poverty line.

 

In 1929 , questions were raised about sustainability of the credit driven boom. Stock market started crashing. In 1930 it was clear that US was in recession. There were suspicions and rumours about the viability of banks. It caused all the depositors to panic and demand their money immediately. Many banks started collapsing , not able to withstand the 'bank run'. In absence of banks, the credit market froze. Federal reserve, instead of boosting money supply, increased the rates in the middle of recession in order to teach a lesson to speculative investors. It aggravated the strained credit market ,the economy plunged into depression. GDP fell. Dow Jones went down by 81% in 3 years. About 25% of population were unemployed by 1932. The impact started to be felt across the Globe.

 

Franklin Roosevelt , in his Presidential address declared, 'There is nothing to fear but he fear itself'. Against this backdrop , in 1936 , English Economist John Maynard Keynes published his book  'General Theory of  Unemployment Interest and Money'. It will identify the causes of depression and suggest ways to come out of the situation. It would become a guide across the Globe to fight recessions for decades and Keynes would become the most influential economist of 20th century.(One Rap video  of Keynes and Hayek of Austrian school was getting circulated in social media)