PDF Summary:The Price of Peace, by Zachary D. Carter

The Price of Peace explores how John Maynard Keynes' economic theories evolved over time, shaped by historical events and personal relationships. Zachary D. Carter delves into Keynes' intellectual development, from his early rejection of utilitarian ideals in favor of pursuing meaning through art and love, to his insistence on government intervention to mitigate economic turmoil.

Carter provides insight on Keynes' eventual embrace of managed, state-backed currencies and deficit spending to combat crises like the Great Depression and World War II, ultimately influencing policies like FDR's New Deal and Britain's welfare state programs.

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• The moral dilemma faced by Keynes during World War I could be critiqued by pacifists who might argue that there is never a justification for supporting war, regardless of the circumstances.
• Keynes' role in the Treasury during World War I and his support for the war effort could be criticized for perpetuating the conflict and its associated human and economic costs.
• Some may argue that Keynes' marriage to Lydia Lopokova and his shift toward heterosexuality are personal matters that should not be overly emphasized in discussions of his intellectual contributions.
• Keynes' disillusionment with Bolshevism and focus on enhancing democratic capitalism could be critiqued from a socialist perspective, which might argue that his views did not sufficiently address the inequalities inherent in capitalism.
• Keynes' advocacy for government-funded infrastructure projects could be criticized from a free-market perspective, which might argue that such interventions distort markets and lead to inefficiencies.
• The collaborative atmosphere that led to the publication of "The General Theory" could be critiqued by those who believe that individual intellectual effort is more important than collective brainstorming in academic achievements.
• Keynes' critique of established economic doctrines and his emphasis on governmental oversight could be challenged by classical economists who maintain that markets are self-correcting and that government intervention often leads to worse outcomes.
• The idea that Keynesian economics was fully embraced by the U.S. during the Great Depression and World War II could be contested by historians who argue that the adoption of Keynesian policies was more gradual and contested than the text suggests.
• Keynes' strategy for controlling inflation through compulsory savings and reducing the significance of national debt could be criticized for potentially reducing individual financial autonomy and for its long-term impact on national fiscal policy.
• The founding of the British Arts Council by Keynes could be critiqued by those who believe that government should not be involved in the arts, arguing that cultural advancement should be driven by the private sector and individual preferences.

The evolving economic theories and fiscal strategies of John Maynard Keynes.

The limitations imposed by a gold-standard monetary system within the framework of unregulated trade and the principles of liberal imperialism.

The 1914 economic downturn underscored the fragility of global financial systems, the importance of confidence in market transactions, and the imperative for state intervention to protect national interests.

The story explores the way in which the economic chaos that occurred in 1914 influenced Keynes' views on money, lending, and the structure of global financial systems. The book provides detailed insights into the intricate nature of international trade before the war, highlighting London's crucial role in finance, and underscores the substantial disruptions in trade and payment networks that ensued with the onset of war. Keynes had to confront the delicate condition of what appeared to be a robust financial system until its sudden collapse, underscoring the critical role of government in sustaining market equilibrium and strengthening economic assurance.

Carter suggests that Keynes' rapid rise within the British Treasury and his early profound grasp of the interplay between market forces and political situations were hastened by the calamities of 1914. He ultimately determined that the stability of finance depended more on the intangible elements of perception and confidence than on measurable indicators. Keynes, previously a firm advocate for free trade and maintaining the gold standard, eventually recognized the advantages of governmental involvement in mitigating economic volatility and protecting national interests. He then concentrated on formulating approaches for international commerce and devising systems to oversee workforce management domestically.

Keynes, in "A Tract on Monetary Reform," emphasizes the dangers of deflation and the risks of moving away from fixed currency values, advocating for the adoption of managed currencies to preserve economic stability.

In the early 1920s, the world's leading nations faced the challenge of establishing a fresh structure for global economic relations. The author highlights the importance of the 1922 Genoa conference, which aimed to create a stable monetary system following a time characterized by rampant inflation and the diminishing value of currency. Before the outbreak of hostilities, a multitude of economists were focused on restoring the old monetary standards; however, Keynes, through Carter's lens, suggested a more nuanced approach, arguing that inflexible monetary standards could hinder economic recovery and lead to social unrest, particularly in times of deflation.

Keynes contested the prevailing confidence in classical economics and adherence to the gold standard, participating in debates at Genoa and authoring the work titled "A Tract on Monetary Reform." The author explores his skepticism about the conventional view that gold is the foundation of currency stability, emphasizing the substantial policy implications that arise from his conceptual viewpoints. Throughout his career, Keynes increasingly advocated for national policies aimed at maintaining price stability, a stance that deviated from the rigid exchange rate system and grew more unconventional over time.

The approach sought to harmonize the unwavering advocacy for free trade by Keynes with the harsh economic realities of the Depression period.

As the Great Depression intensified, Keynes' views on international commerce underwent further development. In 1931, a leading publication featured Keynes' innovative suggestion for a provisional levy on imports to protect domestic production and employment during financial instability. Carter portrays Keynes' proposal as a surprising pivot that unsettled his progressive and socialist allies, who had regarded him as a firm advocate of free trade, a stance they thought supported international cohesion and the enhancement of a nation's economic infrastructure.

Keynes argued that to protect against economic instability and fluctuations, it was essential to implement policy adjustments because the harsh economic realities of the Depression rendered the traditional liberal endorsement of unfettered global trade impractical and excessively optimistic, especially in light of the era's challenges. Carter emphasizes that Keynes saw trade liberalization as a critical tool, comparable to a contingency plan, to be employed judiciously during periods of intense economic distress.

Money as Political Tool and The Rejection of Scarcity

Investigating the historical foundations of capitalism and the crucial part that government has in forming and guiding the economic strategies, as demonstrated in the influential theories of John Maynard Keynes.

While scrutinizing outdated economic frameworks in the early 1920s, he came to the unexpected realization that the concept of a market system developing autonomously without the state's current influence was incorrect. Carter outlines how Keynes' economic theories evolved, influenced by his fascination with ancient Babylon's monetary systems and his collaboration with Piero Sraffa at Cambridge, culminating in his influential 1936 publication, "The General Theory of Employment, Interest and Money."

Carter explores the concept presented by Keynes in "A Treatise On Money," which suggests that the foundations of contemporary capitalism are closely linked with the functions of government, rather than having been set in place prior to the formation of monarchies and state institutions. He realized that the origin of money was not merely a mechanism for everyday commerce but also a means of governance established by ancient Mesopotamian leaders. Carter argued that the government has a responsibility to define the nature and value of currency, while also guaranteeing its stability as a reliable measure for assessing economic exchanges.

The Savings Dilemma encompasses difficulties such as involuntary unemployment, market fluctuations, and psychological barriers that hinder the attainment of market equilibrium, which collectively represent a critique of Say's Law.

In this section, Carter explores Keynes' challenge to the traditional economic belief that supply naturally creates the demand it requires. The writer describes how Say's principle, a fundamental concept of hands-off economic policy, had been invoked to reject any form of government involvement in the economy unless it was specifically aimed at enhancing productivity or reducing production expenses. The belief that continuous unemployment and economic slumps were impossible, attributing such events to a lack of worker motivation, laid the groundwork for harmful measures implemented when the Great Depression began under Hoover's leadership.

Carter details Keynes' thorough critique of Say's Law in his influential book, "The General Theory." Keynes demonstrated the idea that people may not always expend their income, and the money they save does not necessarily get invested immediately. Second, Carter emphasizes that Keynes was of the opinion that the decision to allocate capital to expenditure or investment is chiefly shaped by the expected risks and rewards associated with new enterprises, rather than being governed by the borrowing costs that are dictated by the interest rate. The realization emerged that banks should not be tasked with aligning savings with investments, given the inherent uncertainty of strategies for long-term investment; rather, it was essential for the government to play a proactive role in this important function.

In "Economic Possibilities for Our Grandchildren," Keynes anticipated a future where the pursuit of fundamental necessities would no longer dominate, thereby allowing new cultural standards to emerge and demonstrating the optimistic promise inherent in his economic ideas.

The insights from "Economic Prospects for Future Generations" continue to be remarkably pertinent, even when considering the significant worldwide economic expansion that occurred throughout most of the last century. Carter emphasizes the importance of the essay, pointing out that it served not only as speculation about future occurrences but also as a vital component that positioned Keynes' subsequent economic concepts within a broader philosophical context. Keynes championed the idea of reevaluating our understanding of progress, moral principles, and the essence of a fulfilling life, underscoring the significance of finding purpose and societal value outside the commercial sphere, instead of solely concentrating on industrial output and financial fixation.

Carter highlights Keynes' prescient prediction regarding the substantial improvement in quality of life that marked the onset of the twenty-first century, a reflection of the true expansion in global economic output, which stemmed from his grasp of the pivotal influence of compound interest. Keynes failed to predict the social repercussions that would arise from this growth. Carter argues that instead of enjoying the advantages of reduced workweeks and collective artistic output, we find ourselves in a period akin to a modern Gilded Age, where the economic progress of recent times has largely favored a select few, while the vast majority face longer working hours and heightened stress. Carter highlights a shortfall in the social framework that Keynes had imagined, especially his neglect of the inequality problem.

Other Perspectives

• Keynes' advocacy for state intervention may be criticized for potentially leading to government overreach and inefficiencies in the market.
• The shift from a gold standard to managed currencies can be argued to have introduced more volatility and less discipline in monetary policy.
• The proposal for a provisional levy on imports could be seen as protectionist and potentially harmful to international trade relations and economic efficiency.
• The idea that trade liberalization should be used judiciously might be countered by the argument that consistent free trade policies are more beneficial for long-term economic growth and stability.
• Keynes' emphasis on the role of government in shaping economic strategies may be challenged by those who believe in the superiority of market-based solutions and limited government.
• The critique of Say's Law by Keynes might be countered by arguments that emphasize the self-correcting nature of free markets and the dangers of government intervention in creating economic distortions.
• The anticipation of a future with less focus on fundamental necessities and more on cultural standards could be criticized for underestimating the continuing importance of economic growth and the challenges of resource scarcity.
• Keynes' failure to predict the social repercussions of economic growth, such as inequality, could be seen as a limitation in his analysis of the long-term implications of his economic theories.

The periods of the New Deal and the Second World War were marked by the implementation and impact of Keynesian economic principles.

The adoption of Keynesian economic theories by the United States

Economists gained influential roles within the corridors of power in Washington.

The publication outlines the significant impact that the New Deal and World War II had in defining the economic landscape of the United States. As the United States braced itself to tackle the Great Depression and the rise of fascism, there was a substantial expansion in the scope of government duties, which in turn heightened the need for economists throughout the tenure of President Franklin D. Roosevelt. Previously confined mostly to academic spheres, economists were called upon to fill important roles in newly created government agencies and to offer advice on economic policy to the White House. The growing power of the Federal Reserve further entrenched this pattern, establishing it as a rival to the Treasury Department in shaping economic policy.

Carter details how an academic discipline in economics was formed and influenced by a changing intellectual landscape. Once established in the United States, Keynesian economic theory began to evolve and branch out, departing from the original philosophical and societal responsibilities envisioned by its creator. Paul Samuelson, along with his distinguished students at MIT, crafted complex economic models, whereas John Kenneth Galbraith and his followers at Harvard engaged in a thorough examination of the consumer culture in America and the influence of corporate power.

The New Deal introduced by Roosevelt signified the end of laissez-faire banking, established obligations for financial intermediaries, and demonstrated the government's willingness to spend more than its revenue.

Carter highlights how the Roosevelt administration fundamentally altered the United States' monetary structure following the economic decline of the early 1930s. The author depicts Roosevelt as an individual who, at first, harbored ambivalent attitudes toward the extent of governmental involvement in the protection of consumer deposits through the creation of the Federal Deposit Insurance Corporation (FDIC). Many financial experts, as Carter points out, were in agreement with Roosevelt's worries regarding the potential for insured bank deposits to encourage more reckless practices among banks, even though they recognized its political inevitability and the financial danger it posed. To strengthen the economy, FDR launched measures aimed at preventing subsequent economic downturns through a comprehensive strategy that involved active investment programs and regulatory oversight, which encompassed the protection of customer savings in banks, the creation of the agency responsible for overseeing stock trades, and the commencement of a wide range of public infrastructure endeavors.

The most dramatic and lasting change in American banking overseen by FDR's administration, however, was the Glass-Steagall Banking Act of 1933, which forced banks to choose between accepting insured deposits and participating in the speculative markets for stocks, bonds, and other financial assets. The book describes how Senator Carter Glass, who chaired the Senate Banking Committee, worked in tandem with Ferdinand Pecora, the committee's chief counsel, to expose a multitude of deceptive practices and fraudulent actions by leading banks, culminating in a bipartisan agreement on the importance of the Glass-Steagall Act, driven by a robust public demand for regulatory action. The law greatly reduced the occurrence of bank collapses that had been a persistent issue in the US banking sector since the 1800s, thus improving the dependability of everyday business dealings until these regulatory safeguards were undone during President Bill Clinton's administration.

Galbraith's efforts to tailor Keynesian ideas to serve American industrial interests and his eventual departure from conventional economic theories.

Galbraith made the case that Carter explores the intricate relationships Galbraith had with peers in the academic and political realms, highlighting his advocacy for Keynesian ideas as pathways to significant economic progress. During his tenure at Fortune magazine, Galbraith wrote an article predicting an economic condition he labeled "194Q," characterized by a collaboration between the government and large corporations aimed at guaranteeing full employment alongside substantial corporate profits.

Critics from the liberal and left-wing Keynesian school of thought accused Galbraith of cynicism and indifference, arguing that he tried to align Keynesian concepts with Cold War necessities and the interests of the corporations he worked for. Joan Robinson, a distinguished Cambridge economist who adhered to Keynesian ideas, leveled criticism at Galbraith's notion, arguing that it represented a mechanism lacking moral foundations, functioning autonomously to reach balance, and simply replacing the market's unseen forces with bureaucratic supervision.

The sway of dominant enterprises and the limitations imposed on the democratic process.

The Kennedy-Johnson Tax Cuts heightened attention on the Phillips Curve, which in turn sparked a renewed emphasis on the significance of monetary policy, and elicited Galbraith's criticism of what he termed as a regressive form of Keynesian economics.

The passage examines the transformation of Keynesian economic policies during the administrations of John F. Kennedy and Lyndon B. Johnson. Carter depicts the revival of Keynesian ideology, which, after being sidelined during the McCarthy era, became the leading economic theory among scholars and exerted considerable sway over federal government policy-making. Carter demonstrates how the team under Kennedy focused on implementing a pragmatic economic policy, emphasizing the importance of a meticulously devised economic plan that incorporated the use of mathematical models and established definitive macroeconomic goals, rather than indulging in abstract ideological debates.

The president's decision to focus on tax cuts for corporations and the wealthy as the primary economic approach, shaped by the dominant intellectual climate and his ambition to secure favor from the business community, faced firm resistance from Galbraith and his peers who favored more progressive economic policies. Carter depicts a period marked by the increasing influence of the scholarly work of Samuelson and the efforts of the Federal Reserve to gain autonomy from the Treasury Department, ultimately leading to the reaffirmation of monetary policy as a key tool for government economic control after a time when it had been eclipsed by fiscal tactics and government spending.

The Great Society, while advocating for progressive social initiatives, persisted in its struggle with poverty issues and the growing threat of widening disparities.

Carter scrutinizes both the successes and the inherent limitations of Johnson's bold social programs, highlighting a shift in progressive perspectives on matters of poverty. Despite achieving full employment and striving for consistent economic growth through substantial tax cuts and an emphasis on the "Phillips curve," the Johnson administration continued to face a range of persistent social challenges. Carter suggests that Johnson believed the New Deal was crucial in establishing the modern American middle class by fostering job growth and improving living conditions. The Great Society's agenda was designed to address a deeply rooted "culture of poverty," a concept Johnson invoked to characterize a series of personal and communal deficiencies that segregated individuals from the broader society, regardless of the availability of employment opportunities.

During Johnson's time in office, a number of progressive objectives were achieved, such as the establishment of Medicare and Medicaid, as well as the passage of significant legislation that strengthened civil liberties and secured voting rights. Subsequent to Johnson's tenure, America witnessed a marked decrease in poverty rates. Carter points out that even though the economy grew substantially during Johnson's tenure, the rate of poverty among African Americans remained markedly higher compared to whites, and the disparity in wealth between affluent individuals and those less fortunate began to revert to the disparities observed prior to the New Deal era. Carter argues that the effort to improve the quality of life for many American families achieved only limited success, as it depended on government-led social initiatives and the steadfast conviction that a robust economy could solve numerous social problems merely by increasing demand proved insufficient.

Despite facing resistance, the lasting influence of the economic theories proposed by John Maynard Keynes was underscored by the rise of neoliberal ideology.

The shift toward neoliberalism favored strategies that were more aligned with market forces, diminishing the focus on democratic values in favor of addressing racial matters, and this represented a departure from the promotion of the Four Freedoms.

In this segment of the book, Carter delves into the emergence of a novel progressive wave that challenged the dominant view on how markets and democratic values are interconnected. Following Ronald Reagan's election, which indicated a shift toward reduced government intervention in the economic policies of the United States and Europe—a shift away from a trend prevalent since the 1930s—the writer of "The Road to Serfdom," first published in 1944, experienced a resurgence of interest in his conservative ideologies. Carter emphasizes the crucial role played by key figures like Milton Friedman in elevating Hayek's stature by blending libertarian economic concepts with a populist disapproval of large government, portraying it as an obstacle to both economic prosperity and a vibrant cultural existence.

Carter delves into the way Friedman's philosophy is intricately linked with the forces of the marketplace, underscoring his belief that "economic freedom" is essential for "political freedom" and that robust markets have the potential to address problems like pollution and societal discrimination. Proponents of the New Deal aimed to promote racial integration in educational institutions by implementing compulsory busing policies across the country, while Friedman argued that vouchers for private education would be a more effective tool in breaking down racial barriers. As Friedman's reputation as a leading thinker solidified, peaking with his Nobel Prize in economics in 1976, his unwavering support for free-market principles became emblematic of the growing "conservative revolution," a movement that would find its zenith in Reagan's presidency, despite Reagan's use of economic strategies that were shaped by Keynesian principles.

The resurgence of monetarist philosophy, along with the intrinsic shortcomings of conventional Keynesian concepts, led to the discarding of the Phillips Curve and the difficulties encountered in the economic practice of meticulous fine-tuning.

The stagflation of the 1970s, according to Carter, was a turning point for Keynesian economics. Both inflation and the unemployment rate were increasing. The foundational predictive models of American Keynesian economics stumbled when confronted with the rapid intensification that ensued after the initial oil crisis in 1973, leading to an economic downturn. Carter argues that Keynesians mistakenly treated the Phillips curve, which illustrates the relationship between inflation and unemployment, as a reliable forecaster of economic trends, even though Keynes himself warned about the fundamental flaws and limitations in economic knowledge stemming from human rationality's boundaries.

The revival of Milton Friedman's monetarist theory occurred as economists who followed Keynes' principles failed to account for the concurrent rise in unemployment and inflation, along with a sequence of politically distasteful strategies to curb inflation, which included President Nixon's clumsy efforts to control prices. This theory advocates for the control of the money supply by central bankers to ensure stable prices, rather than relying on government spending and taxation to influence economic demand.

The interaction between global trade and the ever-present specter of inequality.

The amalgamation of NAFTA, the WTO, and China into a worldwide framework that operates under more relaxed rules and is influenced by the forces of financial markets.

Carter contends that Bill Clinton finalized the endeavor, which Jimmy Carter had begun, to tailor neoliberal economic principles to suit the administration of a contemporary democratic society. During the Clinton presidency, there was a significant transformation in economic strategy, marked by a movement toward less regulation, more private sector involvement, and an active endorsement of worldwide free trade, culminating in what is widely known as "globalization." In his discussions with experts on economic and administrative matters, Clinton acknowledged the importance of earning the trust of financial markets and diminishing barriers to trade as key steps to foster economic growth and to catalyze innovation within burgeoning technology industries.

Clinton achieved his objectives by implementing policies that resulted in the establishment of the World Trade Organization and by initiating stable trade relations with China on a permanent, normalized basis. Carter underscores the consensus among specialists that global wealth can be increased through the support of reduced tariffs and the encouragement of free global trade, a perspective often referenced by Clinton and his advocates as having the endorsement of the economic fraternity.

The collective referred to as "The Committee to Save the World" went through a period characterized by the rise and fall of quantitative economic models, the collapse of a significant hedge fund, and the forsaking of Keynesian principles regarding uncertainty.

Carter portrays the intense fervor for economic and scholarly endeavors that swept through the United States, with a particular surge on Wall Street, in the 1990s. At the height of the "dot-com" bubble, numerous individuals were convinced that the emergence of revolutionary technologies and financial innovations had greatly reduced the risks associated with market speculation and economic instability, a viewpoint that was in stark contrast to the warnings issued in Keynes's influential book "The General Theory." Carter highlights the era's critical moments, including the awarding of the 1997 Nobel Prize in Economic Sciences and the unforeseen challenges encountered by the hedge fund renowned for its sophisticated financial tactics. Myron Scholes and Robert Merton, who were pivotal in establishing LTCM, were honored with the 1997 Nobel Prize in Economics for their groundbreaking contributions to the valuation of options. Carter highlights the irony that the exactness of their models actually exacerbated the company's financial deficiencies, leading to its collapse in 1998 when economic turmoil in Russia threw off its risk assessments.

The story of LTCM emphasizes how accurately Keynes grasped the concepts of speculation and uncertainty, showing that even highly regarded economists were unable to manage risk or predict future movements in the financial markets effectively. The collapse also highlights the importance of the methods used to communicate political information and emphasizes the essential function that financial institutions play in an era marked by extensive economic interconnectedness. The government's intervention to rescue LTCM demonstrated its dedication to safeguarding the stability of the financial system against systemic risks, in accordance with the guidance provided by the then Secretary of the Treasury. This approach benefited both Rubin and the broader financial industry, while at the same time heightening the market's propensity for risk, setting off a series of events that culminated in the financial crisis of 2008.

The economic downturn of 2008, coupled with the adoption of strategies rooted in Keynesian economics, the stimulus and rescue initiatives under President Obama's tenure, and the oversight of the middle-class citizens in the United States, are notable occurrences.

The economic strategies employed by the Bush and Obama administrations during the 2008 financial crisis were influenced by the economic theories proposed by John Maynard Keynes. The government deemed incurring significant debt crucial for bolstering a weakening economy and mitigating the effects of the stock market crash and the ensuing economic downturn. Our strategies for managing financial crises have been profoundly influenced by the principles of Keynesian economics, a point Carter expands upon through his analysis of the 2009 bank rescue efforts, the TARP program, and the economic stimulus laws. The Federal Reserve would have been ill-equipped to handle the fallout of the crisis without a grasp of Keynesian economic principles that underscore the significance of maintaining stable prices, exercising monetary oversight, and upholding the crucial role of a central financial safety mechanism.

Other Perspectives

• Economists' influence in government can lead to a technocratic approach where economic efficiency may overshadow other important values such as equity or democratic participation.
• The end of laissez-faire banking and increased government spending can be criticized for potentially reducing economic efficiency, discouraging private investment, and leading to higher government debt levels.
• Galbraith's adaptation of Keynesian ideas to American industrial interests can be seen as a compromise that may have diluted the original intent of Keynesian economics to serve broader social goals.
• The focus on the Phillips Curve and monetary policy during the Kennedy-Johnson era can be critiqued for potentially oversimplifying the relationship between inflation and unemployment, leading to policy mistakes such as those seen in the 1970s stagflation.
• The influence of dominant enterprises can be defended as a natural outcome of market competition and innovation, and the limitations on the democratic process may be seen as necessary trade-offs for economic growth and stability.
• Global trade and the integration of markets, while often criticized for exacerbating inequality, can also be argued to have lifted millions out of poverty and increased overall global wealth.
• The implementation of Keynesian principles during the New Deal and WWII can be critiqued for potentially creating a dependency on government intervention and discouraging private sector solutions.
• The resurgence of monetarist philosophy and the rejection of Keynesian fine-tuning can be defended as a necessary correction to the overreliance on government intervention, emphasizing the importance of market mechanisms.
• The response to the 2008 economic downturn with Keynesian-inspired strategies can be criticized for increasing national debt and potentially creating moral hazard by bailing out failing institutions.