The Wisdom of Ants by SHANKAR JAGANATHAN

Author:SHANKAR JAGANATHAN [SHANKAR JAGANATHAN]
Language: eng
Format: epub
Publisher: Westland Books Pvt Ltd
Published: 2012-11-29T16:00:00+00:00

The Keynesian Era

John Maynard Keynes was born in a family of wealthy academicians. His father was the registrar of Cambridge University and after his own education at Cambridge, Keynes qualified for the civil services, working for two years before he returned to the academic world to teach economics. Right through his career, he successfully straddled the academic world and the corridors of power. Keynes played an active role in organizing finances for the British First World War efforts. Later, he was a member of the British delegation negotiating the peace treaty with Germans.

Keynes’ first claim to fame was as the author of The Economic Consequences of the Peace. In this essay, he predicted the outcome of the ill-conceived reparation terms set for the Germans in the Treaty of Versailles. He foresaw the consequences of the social upheaval (which eventually led to the rise of Hitler) that ensued as Germany was pushed into an economic crisis by the impractical demands made by the victorious allies to compensate them for their war losses. With detailed workings he demonstrated that the terms of repayment set for Germany were beyond its existing productive capacity. After this maiden recognition, he was an active contributor on public debates. With a receptive audience, he was widely heard on issues ranging from monetary policy, funding strategies for war and the toughest economic challenge of his era – the unemployment thrown up by the Great Depression.

As the Second World War came to an end, Keynes was at the forefront of initiatives to create a new international monetary system. The 1944 meeting at Bretton Woods, New Hampshire, attended by delegates from forty-four nations, was the culmination of these efforts to install a new international monetary system. This meeting laid the foundation for four new global initiatives, and the three organizations conceived there survive till date – the International Monetary Fund, World Bank, and the General Agreement on Tariffs and Trade, which has now morphed into the World Trade Organization.

The fourth initiative f was not an organization but a well-defined system for regulating the relationships between the currencies of the participating countries.

f The Bretton Woods Agreement, as it is popularly called, was a mechanism for regulating the relationship between currencies of the participating countries. As most of the countries engaged in the war had resorted to deficit finance and printed money to provide liquidity, they could not return to the gold standard, as they did not have adequate gold reserves. In the gold standard, currencies issued by the governments are backed by gold reserves and any holder of the currency could redeem it for gold or give gold and get currency in return.

The Bretton Woods agreement provided only for US dollars to be convertible into gold and all the other countries were required to fix the exchange rate for their currencies with respect to US dollars. Once fixed, these exchange rates would remain unchanged, unless there was a crisis in that country, which led to a structural imbalance. The crisis-plagued country

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