Keynes and International Macroeconomics
Although Keynes is widely recognized as the economist who more than any
other helped to create macroeconomics, according to Vines (2003), the final
volume of Robert Skidelsky’s magnificent biography of Keynes makes it
clear that he also played a key role in the development of modern international
macroeconomics. In 1945 the international economic system was in a
complete shambles and it has taken over 50 years to rebuild the global
economic system. In July 1944 representatives from 45 countries met at
Bretton Woods in New Hampshire, USA, to discuss the post-war establishment
of major international institutions whose purpose would be to facilitate
international cooperation and increasing international economic integration
and development, thereby improving the stability of the world economy. A
major concern of the Bretton Woods delegates was to help prevent a recurrence
of the disastrous events and consequences of economic mismanagement
that had occurred during the interwar years. The outcome of the meeting was
the creation of what John Maynard Keynes labelled the ‘Bretton Woods
twins’, the International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD), now known as the World Bank.
While the main objective of the World Bank is to focus on long-term economic
development and poverty reduction issues, the main objective of the
IMF, as originally set out in its Articles of Agreement (Charter), is the shortrun
stabilization of the international monetary system. In December 1945, the
IMF officially came into existence when 29 countries joined, and it finally
began financial operations on 1 March 1947. The World Bank began formal
operations on 25 June 1946. In addition, the General Agreement on Tariffs
and Trade (GATT) was established in 1947, with the main purpose to promote
trade liberalization by encouraging and facilitating the lowering of trade
barriers. In a series of eight negotiating rounds before the current Doha
Round, GATT succeeded in significantly cutting tariffs and reducing other
barriers to trade. The GATT was never established as a formal institution but
was set up as an interim device which would operate until the establishment
of an international trade organization (ITO). In 1995 this was finally achieved
with the establishment of the World Trade Organization (WTO).
Skidelsky describes Keynes as a ‘joint author’, along with Harry Dexter
White, of the Bretton Woods international monetary system. Vines (2003,
p. 339) goes further and argues that Keynes ‘came to an extraordinary clear
understanding of how pieces of the global economy interact, driven by
policies of autonomous nations’. Keynes’s work on British war finance and
his quest to ‘save Britain from financial ruin at the hands of the US at the
end of the war’ pushed him towards a sophisticated understanding of the
emerging post-war international economic system. By 1945 Britain’s economic
and financial position was catastrophic. In response to this crisis
Keynes’s work during the last few years of his life created international
macroeconomics and this contribution is ‘as important as any of Keynes’s
achievements as an economist’ (Vines, 2003, p. 339). Keynes’s wartime
work builds on his earlier contributions to international finance contained
in Indian Currency and Finance (1913), A Tract on Monetary Reform
(1923), The Economic Consequences of the Peace (1919), The Economic
Consequences of Mr. Churchill (1925), and A Treatise on Money (1930).
Keynes v. the ‘old’ classical model 85
Unlike the General Theory, which has a closed economy setting, Keynes’s
earlier work highlighted the workings of the international monetary system.
Vines goes so far as to claim that ‘Keynes invented’ the two-country version
of what later became the Mundell–Fleming IS–LM–BP model (see
Chapter 3, section 3.5).
Keynes’s extraordinary vision of the emerging shape of the international
economic system had already crystallized by 1944. Vines relates a personal
discussion he had with Nobel Memorial Laureate James Meade in which
Meade recalled witnessing Keynes sketching out ‘on the back of an envelope’
something similar to Table 2.2 as his vision of the future.
While the GATT rather than an international trade organization was established
in 1947, the vision contained in Table 2.2 is a remarkably accurate
picture of what came to be known as the ‘Bretton Woods system’.
Although Keynes is widely recognized as the economist who more than any
other helped to create macroeconomics, according to Vines (2003), the final
volume of Robert Skidelsky’s magnificent biography of Keynes makes it
clear that he also played a key role in the development of modern international
macroeconomics. In 1945 the international economic system was in a
complete shambles and it has taken over 50 years to rebuild the global
economic system. In July 1944 representatives from 45 countries met at
Bretton Woods in New Hampshire, USA, to discuss the post-war establishment
of major international institutions whose purpose would be to facilitate
international cooperation and increasing international economic integration
and development, thereby improving the stability of the world economy. A
major concern of the Bretton Woods delegates was to help prevent a recurrence
of the disastrous events and consequences of economic mismanagement
that had occurred during the interwar years. The outcome of the meeting was
the creation of what John Maynard Keynes labelled the ‘Bretton Woods
twins’, the International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD), now known as the World Bank.
While the main objective of the World Bank is to focus on long-term economic
development and poverty reduction issues, the main objective of the
IMF, as originally set out in its Articles of Agreement (Charter), is the shortrun
stabilization of the international monetary system. In December 1945, the
IMF officially came into existence when 29 countries joined, and it finally
began financial operations on 1 March 1947. The World Bank began formal
operations on 25 June 1946. In addition, the General Agreement on Tariffs
and Trade (GATT) was established in 1947, with the main purpose to promote
trade liberalization by encouraging and facilitating the lowering of trade
barriers. In a series of eight negotiating rounds before the current Doha
Round, GATT succeeded in significantly cutting tariffs and reducing other
barriers to trade. The GATT was never established as a formal institution but
was set up as an interim device which would operate until the establishment
of an international trade organization (ITO). In 1995 this was finally achieved
with the establishment of the World Trade Organization (WTO).
Skidelsky describes Keynes as a ‘joint author’, along with Harry Dexter
White, of the Bretton Woods international monetary system. Vines (2003,
p. 339) goes further and argues that Keynes ‘came to an extraordinary clear
understanding of how pieces of the global economy interact, driven by
policies of autonomous nations’. Keynes’s work on British war finance and
his quest to ‘save Britain from financial ruin at the hands of the US at the
end of the war’ pushed him towards a sophisticated understanding of the
emerging post-war international economic system. By 1945 Britain’s economic
and financial position was catastrophic. In response to this crisis
Keynes’s work during the last few years of his life created international
macroeconomics and this contribution is ‘as important as any of Keynes’s
achievements as an economist’ (Vines, 2003, p. 339). Keynes’s wartime
work builds on his earlier contributions to international finance contained
in Indian Currency and Finance (1913), A Tract on Monetary Reform
(1923), The Economic Consequences of the Peace (1919), The Economic
Consequences of Mr. Churchill (1925), and A Treatise on Money (1930).
Keynes v. the ‘old’ classical model 85
Unlike the General Theory, which has a closed economy setting, Keynes’s
earlier work highlighted the workings of the international monetary system.
Vines goes so far as to claim that ‘Keynes invented’ the two-country version
of what later became the Mundell–Fleming IS–LM–BP model (see
Chapter 3, section 3.5).
Keynes’s extraordinary vision of the emerging shape of the international
economic system had already crystallized by 1944. Vines relates a personal
discussion he had with Nobel Memorial Laureate James Meade in which
Meade recalled witnessing Keynes sketching out ‘on the back of an envelope’
something similar to Table 2.2 as his vision of the future.
While the GATT rather than an international trade organization was established
in 1947, the vision contained in Table 2.2 is a remarkably accurate
picture of what came to be known as the ‘Bretton Woods system’.
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