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Keynes on the causes of the Great Depression

By 1932 a draft of the General Theory (GT) was basically finished, including the central concept of effective demand, and Keynes have moved away from the Wicksellian framework of the Treatise on Money (TM). From a policy point of view the new view implied that the cause of the Great Depression was less the high rates of interest (above the natural rate), and the emphasis on the Gold Standard, that had dominated his views in the TM, to a more straightforward blame on reduced spending in the US.

In The Means to Prosperity from 1933, in which most of his policy views were expounded (and published before the GT) Keynes argues that:
Note that he clearly suggests that the global crisis had its epicenter in the US. Also, even though he is concerned with the role of expenditure in the level of activity, he still refers to the recovery as having price effects ('raising world prices').

PS: Arguably those authors like Eichengreen and Temin that emphasize the role of the Gold Standard remain closer to the TM and its Wicksellian framework (which would make sense for New Keynesian authors), while Romer, even though she remains firmly wedded to the idea of a natural rate, would be closer to the Keynes of The Means to Prosperity and the GT. See older post here.


  1. Keynes in the General Theory appears to have reached a higher synthesis: depressions and recessions occur when the marginal efficiency of capital schedule is not sufficiently high relative to the prevailing nominal interest rate (on private sector loans, particularly business loans) to produce a pace of investment flows that would deliver full employment, given the existing savings preferences out of income flows of all the sectors (government, private sector - households and firms, and external trade partners), the obverse of which he compacted into the marginal propensity to consume, but which is better defined as the marginal propensity of each sector to spend out of income flows. Notice his emphasis on loan expenditures, which is not just a reference to fiscal expenditures financed by debt issuance (preferably to banks, in his thinking, which could expand balance sheets without having to first attract deposits, breaking the loanable funds paradigm), but a reference to any sector/agent spending in excess of income flows by incurring more debt. This naturally leads us off to the financial instability theories of Minsky, where credit and balance sheets are front and center, and to the stock/flow consistent, sectoral financial balance approach of Godley. It is all, in other words, of a piece, once you see the linkages.


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