Temin vines the leaderless economy; why the world economic system fell apart and how to fix it (2013)

The Leaderless Economy The Leaderless Economy Why the World Economic System Fell Apart and How to Fix It PETER TEMIN and DAVID VINES PRINCETON UNIVERSITY PRESS Princeton and Oxford Copyright © 2013 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu All Rights Reserved Library of Congress Cataloging-in-Publication Data Temin, Peter The leaderless economy : why the world economic system fell apart and how to fix it / Peter Temin and David Vines pages cm Includes bibliographical references and index ISBN 978-0-691-15743-6 (alk paper) Economic policy International economic relations Global Financial Crisis, 2008–2009—Government policy I Vines, David II Title HD87.T416 2013 320.6–dc23 2012032589 British Library Cataloging-in-Publication Data is available This book has been composed in Minion Pro with ITC Franklin Gothic display by Princeton Editorial Associates Inc., Scottsdale, Arizona Printed on acid-free paper ∞ Printed in the United States of America 10 For our children and grandchildren in the hope that they will soon see a return to prosperity For Peter: Elizabeth, Melanie, Colin, Zachary, and Elijah For David: Sam, Alexander, Louis, Luke, and Tom CONTENTS Preface ix ONE The World Economy Is Broken TWO The British Century and the Great Depression 21 THREE Keynes from the Macmillan Committee to Bretton Woods 59 FOUR The American Century and the Global Financial Crisis 107 FIVE Restoring International Balance in Europe 151 SIX Restoring International Balance in the World 205 SEVEN Using Theory to Learn from History 243 Appendix 257 Notes 275 References 283 Index 299 PREFACE T he discussions that led to this book began after the eruption of the unpronounceable Icelandic volcano, Eyjafjallajökull, stranded Peter in London after a 2010 conference David invited him to wait for the skies to clear in Oxford, leading to four days of discussion about the topics of this book We transformed our clear agreement on the issues into a book outline during Peter’s week in Oxford in the spring of 2011, and we worked on it while David visited MIT in the fall of 2011 under the MIT-Balliol Program (We first met two decades earlier, when David hosted Peter at Balliol College under this same program, and have been in touch since.) We have been giving talks and writing papers on these themes over the past few years, and we decided that a full-length presentation of our thesis and its historical background would help current policy deliberations We offer this volume to all who are interested in the world economy and distressed at the lack of understanding often shown in the popular press As we describe in the text, we use only simple economic models and reserve discussion of the models—as opposed to the history and analysis—to an Appendix For their feedback we thank the audiences at the American Academy of Arts and Sciences; the Asia  Europe Economic Forum in Paris, Seoul, and Tokyo; the Australian National University; the Fundación Ramón Areces (Madrid); MIT; Oxford University; the Reserve Bank of Australia; Swarthmore College; the University of California at Berkeley; and Wake Forest University And we thank Christopher Adam, Christopher Allsopp, Ross Garnaut, and Max Watson for their insights along the way We thank Balliol and Nuffield Colleges for accommodation while meeting in Oxford and Balliol College and MIT for accommodations while meeting in Cambridge, Massachusetts 302 Index Crystal Palace exhibition, 18 Cunliffe, Lord, 28–29, 57 currencies See devaluation; exchange rates; specific currencies currency crises: of 1930s, 40–46; of 1931, 41–48; versus bank panics, 14 current account balances: countries with largest deficits and surpluses in, 9–10; in EMU, 170–72, 171f, 175, 186–87, 187f Czechoslovakia, devaluation in, 56 Danatbank, 41, 42 Dawes Plan, 31–32, 33, 37, 113–14 debt(s): public and private need for reduction of, 1–2; transfer problem of, 26; unemployment in relation to, 11 See also specific types debt crisis of 1980s, in Latin America, 208 deficits See specific types deflation: British, Keynes’ critique of, 61; after First World War, 30; in price-specie-flow model, 15–16 deflationary policies: in Europe, in 1920s, 30, 61; in Germany, in 1930s, 38–39, 48, 52–53; in United States, in 1930s, 47, 48; in United States, in 1970s, 125, 128–29 Delors, Jacques, 162 Delors Commission, 162 demand deposits, in currency crises of 1930s, 41, 42t democracy, in Nazi Germany, 54–55 Democratic Party (US), 141, 149 Deng Xiaoping, 125–26, 127, 138 Denison, Edward, 118 depressions: change of hegemons as cause of, 18; world, definition of, 12 See also Great Depression deregulation, US: of airline industry, 126; in Global Financial Crisis of 2008, 148, 150; of savings and loan associations, 134–35; Smith (Adam) and, 130–31; in Washington Consensus, 128, 131, 133 Detroit, Treaty of (1950), 123–24 Deutschmark, in European integration, 162, 163–64, 167 devaluation: in Britain, 46, 76–77; in China, 52; in Czechoslovakia, 56; in France, 55, 56; in Italy, 56; in Japan, 51; Swan diagram and, 265; in Tripartite Agreement of 1936, 55; in United States, 48, 53, 115, 124–25 developmental deficit, European, 118–19, 124, 152 discrimination, in European integration, 162 disequilibrium: European history of, 118–19, 124; fundamental, 111–12 Dolchstosslegende (stab-in-the-back legend), 27–28, 37, 54, 57 dollar: devaluation of, 48, 53, 115, 124–25; in financial crises of 1931, 41, 47–48; fixed exchange rate between renminbi and, 205, 216–21, 226–29, 247; floating exchange rate between euro and, 205–6, 220–29, 247; gold convertibility of, end of, 112, 155; gold convertibility of, restoration after First World War, 35–36 dot-com crash, 142–43, 218–20 downturn of 2008–9, in world economy, 1, 229 Draghi, Mario, 252 Dreadnought (battleship), 24 DSGE See dynamic stochastic general equilibrium Duisburg (Germany), Allied occupation of, 31 Düsseldorf (Germany), Allied occupation of, 31 dynamic stochastic general equilibrium (DSGE) models, 268, 270–73 East Asia: Bretton Woods II system in, 215–21; economic rise of, 125–27, 209–10; export-led economic strategy of, 126–27, 209–10, 214–15; financial crisis of 1997 in, 136, 174, 210–15, 217; fixed exchange rates in, 210; foreign investment in United States from, 138–40; Global Financial Crisis of 2008 in, 236–39; Great Depression in, 51–52; history of economic growth in, 125–27, 208, 209–10; industrialization of, 127, 207, 209–10, 214; in three-body problem of world economy, 206, 226–29, 247; in world economy after Second World War, 207–10 See also specific countries East Germany, reunification of, 165–66, 168 ECB See European Central Bank Economic Consequences of Mr Churchill (Keynes), 61 Economic Consequences of the Peace, The (Keynes): conclusions of, 25–26; Keynes’ return to questions raised in, 16, 19, 25; as preparation for Macmillan Committee, 66–67, 76; reception of, 25, 59; writing of, 25 economic crises See financial crises economic growth: Asian history of, 125–27, 208, 209–10; European golden age of, 117–19, 151–55, 208; European history of, 115–19, 117t, 208–9; modern models of, 268, 270; after Index Second World War, 207–9; US golden age of, 119–24, 208; US history of, 115–24, 117t, 208; Washington Consensus on, 128, 131, 133 economic history, relationship of economic theory and, 243 Economic Journal, 60 economic policies: objectives of, 175–76, 215 (See also external balance; internal balance); optimal, in normal circumstances, 269; for prevention of crises, 269 See also specific types economic theory, relationship of economic history and, 243 education, US, decline of, 140–41 Education Act of 1944 (Britain), 140 EEC See European Economic Community EFSF See European Financial Stability Facility elasticity pessimism, 99 elections: British, of 1929, 33; German, of 1932, 27–28; impact of unemployed voters on, 6; US, of 2012, 253 electricity, invention of, 119 employment: in definition of internal balance, 12, 82; in price-specie-flow model, 15–16; ratio of population to, in United States, 4, 5f, 133 See also unemployment EMU See European Monetary Union end-of-regime financial crises, 17–18, 245 England See Britain equity markets, East Asian, 210 Erzberger, Matthias, 27 ESM See European Stability Mechanism EU See European Union euro: establishment of, 7, 108; faulty analysis leading to establishment of, 152, 169–70; floating exchange rate between dollar and, 205–6, 220–29, 247; in Global Financial Crisis of 2008, 169; inadequate political support for, 152, 169–70; initial success of, 169 See also European Monetary Union Eurobonds, 7, 8–9, 200, 251–52 Europe, 151–203; after Bretton Woods collapse, response to, 157, 161–63; in Bretton Woods system collapse, 155–57; cooperation within, after Second World War, 108, 152–55; current risk of economic crisis in, 1; developmental deficit in, 118–19, 124, 152; financial crises of 1931 in, 41–46; Global Financial Crisis of 2008 in, 147, 169, 173, 232–36, 239; golden age of economic growth in, 117–19, 151–55; history of economic growth in, 115–19, 117t; 303 inflation-targeting regime and, 157–60, 179–80, 183, 199; integration of (See European integration); in three-body problem of world economy, 206, 226–29, 247; unemployment in, in 1930s, 49–50; unemployment in, recent rates of, 6–7, 8f; US economic relations with, 205–6, 220–26; in world economy after Second World War, 207 See also specific countries and regional organizations European Central Bank (ECB): centralization of monetary policy in, 7; expansion of role of, 252–53; in financial scare of 2011, 200; in Greek debt crisis, 11; interest rates set by, 280n11; success of economic management by, 170, 179–80, 183 European Coal and Steel Community, 108, 153 European Commission: assessment of EMU by, 184, 187–88; establishment of, 163 European Common Agricultural Policy, 124 European Council, 163 European Council of Ministers, 163 European Currency Union, 108 European Economic Community (EEC): decisionmaking mechanisms of, 162, 163; Delors Commission of, 162; establishment of, 154–55; evolution into EU, 163; goals of, 154, 164; institutionalization of, 163 European Financial Stability Facility (EFSF), 200 European integration, 161–69; of agricultural policy, 154–55, 161–62; first steps toward, 152–55; fixed exchange rates in, 163–64, 216, 246–47; German reunification and, 165–66, 168; institutional, 154–55, 163; monetary (See European Monetary Union); motives of individual countries in, 165; political, 154, 164–65, 167, 168 See also specific regional organizations European Monetary System: establishment of, 162; collapse of, 166–67, 168; German reunification and, 166; Walters critique of, 190–91 European Monetary Union (EMU) (Eurozone), 161–203; austerity measures in, 196, 198, 201–3, 228, 235; banking scare in, 199–200; versus Bretton Woods II system, 221; Britain’s opt-out clause for, 168–69; consequences of breakup of, 202–3; current account balances in, 170–72, 171f, 175, 186–87, 187f; failures in planning for, 152, 169–70; 304 Index European Monetary Union (continued) fiscal policy of, 7, 180–81, 183, 191–99; fixed exchange rates within, 163–64, 216, 246–47; foreign debts in, 172–73; formal establishment of, 169; German reunification and, 168; in Global Financial Crisis of 2008, 169, 173; versus gold-standard mechanism, problems of, 71, 96, 197; interest rates in, 182–83, 189–91, 189f, 197, 216, 280n11; internal and external balance in, 175–79, 188, 198, 246–47; Lisbon strategy for, 188–89; monetary policy of, 7, 189–90, 198; number of countries in, 6, 169; origins of, 108, 161–69; policy system components of, 179–84; potential solution to problems of, 198–203, 236; risk premiums in, 173–75, 184, 200–201; Stability and Growth Pact in, 174, 181–83, 247; unemployment in, recent, 6–7, 8f; versus United States, formation of, 6–7; Walters critique of, 190–96 See also euro European Parliament, 163 European Payments Union, 110 European Single Market, 162, 163 European Stability Mechanism (ESM), 200 European Union (EU): Lisbon strategy of, 188–89; number of countries in, 6, 163; origins of, 108, 163; political integration in, 164–65; taxing powers for, 201–2; versus United States, 6–7 Eurozone See European Monetary Union exchange rates: after Bretton Woods collapse, 159–60, 161–62, 163; in Bretton Woods system, 99–102, 111–12, 155–57; in East Asian financial crisis of 1997, 214; in Global Financial Crisis of 2008, 231–33, 238–40; in three-body problem of world economy, 226–29 exchange rates, fixed: in DSGE models, 272; in East Asia, 210; within Europe, 163–64, 216, 246–47; versus floating exchange rates, mechanisms of, 221–22, 224; between renminbi and dollar, 205, 216–17, 226–29, 247; types of problems of, exchange rates, floating: in DSGE models, 272; between euro and dollar, 205–6, 220–29, 247; versus fixed exchange rates, mechanisms of, 221–22, 224; in inflation-targeting regime, 159–60; move to, after Bretton Woods collapse, 125, 157, 159–60, 163 exchange rates, real: definition of, 15, 243; under gold standard, 14–15; in Swan diagram, 243, 260–62 expansionary policies, EMU, 96 export-led economic strategy: British, 22–23, 32, 44–45; Chinese, 127, 138, 143, 149, 214–15, 246, 259; East Asian, 126–27, 209–10, 214–15; German, 246; Japanese, 126–27, 138, 209 external balance: definition of, 13; in EMU, 175–79, 188, 198; evolution of Keynes’ understanding of, 82, 92–104; gaps in Keynes’ understanding of, 82; in Global Financial Crisis of 2008, 232–33; under gold standard, 13–14; link between internal balance and (See internal balance–external balance linkage); in price-specie-flow model, 15; after Second World War, 94–105; during Second World War, 94 external debts See foreign debts extremism, unemployment and, Fannie Mae, 135, 146, 148 Federal Reserve, US: versus European Central Bank, 179; in financial crisis of 1931, 46–47, 48; in Global Financial Crisis of 2008, 145–46, 148–49, 231, 233; in Great Depression, 48, 56; hedge funds rescued by, 136–37; and inflation of 1970s, 125, 126; New Deal reform of, 121; response to dot-com crash, 142; and speculation on stock exchange, 36 Federal Securities Act (US), 121 financial crises: of 1931, European and US, 41–48, 252; of 1980s, Latin American, 208; of 1980s, US S&L crisis, 134–35; of 1997, East Asian, 136, 174, 210–15, 217; causes and mechanisms of, 269; end-of-regime versus ordinary, 17–18, 245; in modern macroeconomic models, 268–73; policies for prevention of, 269; as sign of macroeconomic dysfunction, 11–12; similarities among all, 17; typology of, 17–18 See also Global Financial Crisis of 2008; Great Depression financial depressions See depressions financial markets, East Asian, 210 financial recessions See recessions financial risks, in EMU, 173–75 financial sector, US: in Global Financial Crisis of 2008, 143–48; innovations in, 128–29, 134–37; LTCM crisis in, 136–37; in modern economic models, 271; rise of, 128–29; savings and loan crisis in, 134–35; wages in, 128–29, 130f, 131 finking, 266 Index First World, after Second World War, 207, 208–9 First World War: British economy weakened by, 62–63; British hegemony after, loss of, 18, 63; end of, 24, 113 (See also Versailles Treaty); German defeat in, and Second World War, 28, 113; German reparations for (See reparations); gold standard in, suspension of, 28; international cooperation after, lack of, 244–45; naval arms race leading up to, 23–24; recovery after, versus Second World War, 107, 111, 151; short-run versus long-run economic policies after, 28–29; start of, 24; US aid after, 111, 113–14 fiscal consolidation, in Global Financial Crisis of 2008, 234–35, 240 fiscal policy: in EMU, 7, 180–81, 183, 191–99; in Global Financial Crisis of 2008, 231, 234–35, 240; versus monetary policy, shift in emphasis on, 158–59 Fischer, Joschka, 253 Fischer, Stanley, 211 Fisher, Irving, 137 fixed exchange rates See exchange rates, fixed Fleming, J M., 223 floating exchange rates See exchange rates, floating Ford (Motor Company), 116, 122, 123 Ford, Henry, 116 foreclosures, mortgage, 148 foreign debts: causes of, 12–13, 172; in definition of external balance, 13; in EMU, 172–73; German reparations as, 26 foreign savings, in domestic investment, Fortune (magazine), 123 Four Year Plans, of Nazi Germany, 54 Framework for Strong, Sustainable, and Balanced Growth, 249 franc: devaluation of, 55, 56; in European integration, 167; flight from, in 1920s, 34; stabilization of, in 1920s, 34–35 France: current account balance of, 10; in European integration, 152–53, 162, 165–69; in European Monetary System, 162, 166, 167; after First World War, economic policies of, 30–31; in First World War, 24; in German financial crisis of 1931, 41, 43; German reparations to, 30–31, 33; in Global Financial Crisis of 2008, 235; gold standard in, 34–35, 36, 56; interwar balance of payments of, 37t; occupation of Germany by, 31; in Second World War, 56–57, 114; in Stability and 305 Growth Pact, 183; in Tripartite Agreement of 1936, 55, 56; unions in, 29, 30 Frank, Barney, 146 Freddie Mac, 135, 146, 148 free trade: barriers to (See trade barriers); in development of international monetary system, 97–98; Keynes on, 77–78, 98–100 French currency See franc Friedman, Milton, 47–48, 159, 269 fundamental disequilibrium, 111–12 GATT See General Agreement on Tariffs and Trade Gaulle, Charles de, 229 GDP See gross domestic product Geithner, Timothy, 146 General Agreement on Tariffs and Trade (GATT): establishment of, 112–13; origins of, 100; in Second World War recovery, 113, 151 general equilibrium theory, 89–90 General Motors, 122–23 General Theory of Employment, Interest and Money, The (Keynes), 87–92; as central intellectual accomplishment of Keynes, 62; Circus group’s influence on, 88–91; evolution of Keynes’ thinking in, 62, 73, 88–92; extension to economy with international trade, 87–88, 90; IS/LM model in, 62, 87, 90, 258–59; Kahn’s multiplier analysis and, 258; limitations of, 87–88; motivations for writing, 16, 82; origins of macroeconomics in, 88–90; price-specie-flow model in, 16; public expenditure on public works in, 91–92; summary of arguments of, 87 German currency See Deutschmark; mark German hegemony: current potential for, 202, 205, 251–53; First World War and, 24, 31; interwar bid for, 31, 37, 40, 55; under Nazi regime, 55, 57 Germany: in Bretton Woods system, 155–56; British arms race with, 23–24; current account balance of, 9–10, 170–72, 171f, 187, 187f; Dolchstosslegende in, 27–28, 37, 54, 57; EMU influence on, 170–72, 171f, 184, 187, 189–90, 195; in EMU reform, 198–203, 205, 236; in European integration, 165–69; in financial crisis of 1931, 41–44, 42t, 43f, 252; in First World War, 24, 57 (See also reparations); in Global Financial Crisis of 2008, 235–36, 239; as hegemon (See German hegemony); history of economic growth in, 119, 208–9; hyperinflation in, 31, 39; 306 Index Germany (continued) industrialization of, 23, 32, 208–9; navy of, 23–24; Nazi (See Nazi Germany); reunification of, 165–66, 168; in Second World War, 56–57; in Stability and Growth Pact, 183; unemployment in, interwar, 6, 38, 54; unemployment in, recent, 8f; unions in, 29; Weimar (See Weimar Republic); West (See West Germany) GI Bill of Rights, 140 GIIPS: definition of, 173, 184; EMU influence on, 184, 186; in EMU reform, 201–3, 236; fiscal policies of, 193–96; in Global Financial Crisis of 2008, 235–36; risk premiums in, 173–74 Glass-Steagall Act of 1933 (US), 121, 141 global economy See world economy Global Financial Crisis of 2008, 143–50, 229–42; bounceback of 2009–10 in, 1; causes of, 147–50; causes of continuing problems of, 234–36; challenges created by, 230–36; contraction of 2007–9 in, 1; cooperation in response to, 230, 240–42; downturn of 2008–9 in, 1, 229; in East Asia, 236–39; as end-of-regime crisis, 17, 18; in Europe, 147, 169, 173, 232–36, 239; events leading up to, 143–47; feasibility of recovery from, 19–20; versus Great Depression, 2–3, 17; groups to blame for, 147–49; IMF in, 212, 213, 242; initial policy responses to, 229–30, 234; loss of hegemonic power in, 2; potential solutions to problems of, 233–42; risks to recovery from, 239–40; start of, 147, 229, 246; start of recovery from, 230 See also specific countries globalization, during twentieth century, 117 Goldman Sachs, 193 gold reserves, in financial crisis of 1931: British, 45–46; German, 42–43, 43f gold standard: British abandonment of, 33, 45–46, 76–77; in British hegemony, 18, 28, 33–34, 44–46; British return to, 62, 71, 76–77, 95; British suspension of, 28, 33; deficits and surpluses under, 13–15; versus EMU, problems of, 71, 96, 197; in France, 34–35, 36, 56; German abandonment of, 43–44; ideology of, in Great Depression, 47–49; in Italy, 30; Keynes on mechanism of, 61, 68–76, 96–97, 191, 197; Keynes on postwar alternatives to, 95–97; Keynes on remedies for, 76–81; Keynes on return to, 61, 71, 76–77; price-specie-flow model of, 3, 14–16; and real exchange rate, 14–15; Tripartite Agreement and, 56; in United States, 35–36, 47–48, 52, 115, 125, 155 Gordon, Robert J., 119 government savings, in domestic investment, Great Britain See Britain Great Depression: countries affected by, 12; difficulty of understanding, 2; in East Asia, 51–52; as end-of-regime crisis, 17, 18, 245; financial crises of 1931 in, 41–48; versus Global Financial Crisis of 2008, 2–3, 17; gold standard ideology in, 47–49; loss of British hegemonic power in, 2, 18, 19, 105, 244–45; in Nazism, rise of, 55; in United States, 48, 56 Great Moderation, 228–29; definition of, 228; economic models of, 133, 270–72; end of, 147; European Central Bank in, 183; misunderstanding of conditions in, 133, 159, 220, 228–29; Taylor Rule and, 220 Great Society programs, 156 Greece: debt payments by, versus German reparations, 26; EMU influence on, 193; in EMU reform, 202; in Global Financial Crisis of 2008, 169, 173; size of debt of, 11; in Stability and Growth Pact, 183; unemployment in, recent, 6, 8f Greenspan, Alan, 137, 142, 218, 220 Greenspan put, 142, 218, 220, 270 Gregory, Emmanuel, 64 gross domestic product (GDP), historical, in Europe versus United States, 116–17, 117t G20: as forum for international cooperation, 248–51; in response to Global Financial Crisis of 2008, 230, 248–49 G20 Mutual Assessment Process (G20MAP), 249–51 Hamilton, Alexander, 6–7 Harrod, Roy, 62, 81, 87, 88, 90 Hawksmoor, Nicholas, 82–83 Hawley-Smoot tariff, 52 Hawtrey, Ralph G., 46 Hayek, Friedrich, 64 hedge funds: in Global Financial Crisis of 2008, 144–45; in LTCM crisis, 136–37 hegemonic power, in world economy: China as, 205, 253–54; cooperation as part of, 18, 54, 244; current, lack of, 2, 19, 247–48; definition of, 18, 36, 244; difficulty of changes to, 2, 18; need for, 2, 18, 105, 147, 244, 247–48; origins of concept, 275n1 (ch 1) See also British Index hegemony; German hegemony; United States hegemony Henderson, Hubert, 78 Hicks, John, in Circus group, 88, 90 See also IS/LM model Hindenburg, Paul von, 27–28, 54, 57 Hitler, Adolf: appointment as chancellor, 28, 54, 57; autocratic power of, 55; in election of 1932, 27–28; Four Year Plans of, 54; versus Roosevelt, 54–55 Holy Grail of Macroeconomics, The (Koo), 17 Hong Kong, in world economy after Second World War, 209 Hoover, Herbert, 43, 47, 48 Hopkins, Sir Richard, 79–81, 83, 85, 91 House of Lords, Keynes in, 59 housing: location as essential characteristic of, 10, 143; US boom in, 133, 143, 144, 147 See also mortgages Howson, Sue, 101 How to Pay for the War (Keynes), 93 Hull, Cordell, 97 Hume, David: “Of the Balance of Trade,” 14; price-specie-flow model of, 3, 14–16, 69 Hungary: financial crisis of 1931 in, 44; interwar balance of payments of, 36 hyperinflation, in Germany, 31, 39 IMF See International Monetary Fund immigration, and economic growth in United States, 116 imperialism, British, US opposition to, 97–98 income, national, in definition of external balance, 13 income distribution, US, 126–33; change in, reasons for, 126, 127–33; change in, since 1980s, 127, 128f; Gini coefficient for, 131, 132f; impact on economic growth, 120; rise of financial sector and, 128–29, 130f; social effects of, 132–33 income tax See taxes India: British ties to, 154; underemployment in 1930s in, 52; in world economy after Second World War, 207–8, 209 Indonesia: financial crises of 1997 in, 136, 174, 211; in world economy after Second World War, 207, 209 industrialization: in British hegemony, 21–23, 32–33; British promotion of, 18; British stagnation in, 23, 32; of East Asia, 127, 207, 209–10, 214; history of interruptions in, 118, 307 119; after Second World War, 207–9; of United States, 23, 32, 115–16 industrial labor, shift from agricultural labor to, 16, 22, 50–51, 127 Industrial Revolution: in Britain, 21–23, 116; impact on price-specie-flow model, 16; innovations of, 21–22; origins of, 21–22; Second, 115–16; after Second World War, 207–8 inflation: under Bretton Woods system, 155; demand for workers and, 12; in EMU, 179–80, 183, 186; after First World War, 31, 36, 39; in First World War, 28, 30; hyperinflation, in Germany, 31, 39; in inflation-targeting regime, 157–60, 179–80, 183, 199; and interest rates, 157–58; in price-specie-flow model, 15–16 inflation, US: in 1970s, 124–26, 156–57; in Cold War, 122; after First World War, 36; Jacksonian, 115 innovations: of Industrial Revolution, 21–22; stagnation of, in Britain, 23, 32; in US economic growth, 119–20; in US financial sector, 128–29, 134–37; in Asian economic growth, 126, 127 institutional integration, European, 154–55, 163 institutions, Keynes’ vision for new, 103–4, 105 interest rates: on bonds, 8–9; in EMU, 182–83, 189–91, 189f, 197, 216, 280n11; evolution of Keynes’ understanding of, 85–89; and floating exchange rates, 221–26; global, 216–19, 223; in Global Financial Crisis of 2008, 229–34; in Great Moderation, 271–72; in inflation-targeting regime, 157–60; in Keynes’ explanation of gold-standard mechanism, 68–76; recent history of, 7–8; in three-body problem of world economy, 226–29 interest rates, US: after dot-com crash, 142–43; in financial crisis of 1931, 47; in Global Financial Crisis of 2008, 150; in rise of financial sector, 128–29 internal balance: definition of, 12; in EMU, 175–79, 188, 198; evolution of Keynes’ understanding of, 82–93; after First World War, 27, 34; gaps in Keynes’ understanding of, 82; in Global Financial Crisis of 2008, 232–33, 234; in price-specie-flow model, 15; during Second World War, 93–94 internal balance–external balance linkage: current need for international cooperation 308 Index internal balance–external balance linkage (continued) on, 244, 246–55; in EMU, failings of, 170, 175–79, 188; in EMU, need for, 198; essential nature of, 15; evolution of Keynes’ understanding of, 82, 92–104; in financial crises of 1931, 42, 48; gaps in Keynes’ understanding of, 82; as Keynes’ central intellectual accomplishment, 62; Keynes’ development of model of, 19, 60, 62, 82, 101; in price-specieflow model, 15; summary of Keynes’ model of, 101–4 See also Swan diagram internal combustion engine, 119 international cooperation See cooperation International Monetary Fund (IMF): after collapse of Bretton Woods system, 157; in competitiveness agreements, 177; in East Asian financial crises of 1997, 136, 211–13; in Global Financial Crisis of 2008, 212, 213, 242; in G20MAP, 249–50, 251; limitations of, 108; origins of, 103–4, 105; purpose of, 112; revised articles of, 157; in Second World War recovery, 111–12, 113, 151 international monetary nonsystem, 225, 228 international monetary system See Bretton Woods international trade: current status of imbalances in, 1–2; history of interruptions in, 117–19; and US wages, 127–28 interventionism, in New Keynesian approach, 159, 269–70 investment: as equal to savings, 9; evolution of Keynes’ understanding of, 83–89; in Keynes’ banana parable, 72–75, 83–85; in public works, Keynesian expansion of, 78–81 Iraq war, 133, 141, 142, 218, 253 Ireland: EMU influence on, 173; fiscal policies of, 193–94 iron, in Industrial Revolution, 21–22 IS/LM model: in Keynes’ General Theory, 62, 87, 90, 258–59; Keynes in development of, 62; New Keynesian analysis of, 271; versus Swan diagram, 258–60, 259f Issing, Otmar, 182, 187 Italy: currency of, 34, 56; current account balance of, 10; EMU influence on, 173; in European Coal and Steel Community, 153; in European integration, 162; in European Monetary System, 162, 166; after First World War, economic policies of, 30; fiscal policies of, 193–94; in Global Financial Crisis of 2008, 235; history of economic growth in, 119; interwar balance of payments of, 36, 37t; unemployment in, recent, 8f Jacksonian inflation, 115 Jaeger, Albert, 195 Japan: in Bretton Woods system, 156; current account balance of, 9–10; economic rise of, 126–27; export-led economic strategy of, 126–27, 138, 209; foreign investment in United States from, 138; in Global Financial Crisis of 2008, 235, 240; Great Depression in, 51; industrialization of, 207, 209–10; invasion of China (1937), 51; in Second World War, 57; unemployment in 1930s in, 51, 52; in world economy after Second World War, 207, 209–10 Johnson, Hugh, 121 Johnson, Lyndon, 124 JP Morgan Chase, 145 junk bonds, 129 Kahn, Richard: in Circus group, 82, 83, 84, 88; multiplier analysis of, 84–85, 258 Kapadia, Sujit, 271 Keynes, John Maynard, 59–105; banana parable of, 72–75, 80, 83–85; in Bretton Woods (See Bretton Woods); on British deflation, 61; on British hegemony, 18; career of, 25, 59–61; central intellectual accomplishment of, 62; on competitiveness agreements, 177; education of, 61; in First World War, end of, 25; on First World War, US aid after, 111, 113; friendships of, 61–62; on gold standard, return to, 61, 71, 76–77; on gold-standard mechanism, 61, 68–76, 96–97, 191, 197; on gold-standard remedies, 76–81; health problems of, 92; intellectual and presentation skills of, 64–66; on international cooperation, need for, 250; junior colleagues in work of, 82, 91 (See also Circus group); liquidity preference theory of, 86; Low cartoon of, 65, 65f; in Macmillan Committee (See Macmillan Committee); on price-specieflow model, 16; on public expenditure on public works, expansion of, 78–81, 91–92; in Second World War preparations, 92, 93; time spent studying Great Depression, 2, 15; on Versailles Treaty reparations, 25–26, 57, 59, 60; world economic stability as primary interest of, 245 See also specific writings Index Keynesian economics: after collapse of Bretton Woods system, 157; monetary policy versus fiscal policy in, 158–59; origins of, 12 See also New Keynesian economics Kindleberger, Charles P., 40, 275n1 (ch 1) King’s College: Circus group’s meetings at, 82–83; Keynes at, 60, 61–62 Kohl, Helmut, 166, 168 Koo, Richard, The Holy Grail of Macroeconomics, 17 Krueger, Anne, 213 Krugman, Paul, 189, 234, 235 labor markets, history of changes to, 50–51 labor mobility, in EMU, 179, 192–93 labor unions See unions Labour Party (Britain), 33, 63 Latin America: debt crisis of 1980s in, 208; unemployment in 1930s in, 52; in world economy after Second World War, 207, 208 See also specific countries Lausanne Conference (1932), 52 leadership See hegemonic power League of Nations, 24, 52, 151 Lehman Brothers, failure of, 10–11, 86, 146 Lend-Lease program, 94, 97–98, 100 Liberal Party (Britain), 61 LIBOR (London Interbank Offered Rate), 144–45, 145f liquidity preference theory, of Keynes, 86 lira, 34, 56 Lisbon strategy, 188–89 loanable funds, 79 loans: difficulty of procuring, 7; personal, 7, 133 See also interest rates London, as global financial center, 18, 22, 63, 77 London Interbank Offered Rate (LIBOR), 144–45, 145f Long Term Capital Management (LTCM), 136–37 Lopokova, Lydia, 62, 75, 81 Low cartoon, 65, 65f LTCM See Long Term Capital Management Lubbock, Cecil, 64 Ludendorff, Erich Friedrich, 27 Luxembourg, in European Coal and Steel Community, 153 Maastricht Treaty (1992), 163, 168, 180–81 MacDonald, Ramsay, 61, 63 Machlup, Fritz, 112 309 Macmillan, Lord, 63, 66, 74–75, 81 Macmillan Committee (1930), 63–82; aims of, 61, 63–64; banana parable in, 72–75, 80; duration of, 64; establishment of, 63; impact on Keynes’ remaining career, 67; inconsistencies in Keynes’ presentations to, 3, 16, 67, 76–82; Keynes as guide for, 64, 67; Keynes’ intellectual and presentation skills in, 64–66; Keynes on expansion of public expenditure on public works, 78–81; Keynes on goldstandard mechanism, 68–76, 96, 191; Keynes on gold-standard remedies, 76–81; Keynes’ preparation for, 66–67; members of, 61, 64; Report of the Committee by, 64, 77, 82 macroeconomics: after collapse of Bretton Woods system, 157–61; DSGE tradition in, 268, 270–73; general equilibrium theory in, 89–90; influence on Keynes’ plans for international monetary system, 100–101; modern models in, 268–73; New Keynesian, 159, 268–73; origins of, 88–90; Smith as patron saint of, 133 Maginot Line, 56–57, 114 Malaysia, financial crises of 1997 in, 136, 174, 214 managerial firms, US, 32 manufacturing: American System of, 116; Japanese, rise of, 126 Mao Zedong, 126, 207 March on Rome (1922), 30 mark (German currency): crisis of 1931 in, 41–44; flight from, in 1920s, 34; restoration of, in Dawes Plan, 32 Marshall, Alfred: career of, 60, 69; Keynes’ departures from, 67, 85, 88, 89, 90; microeconomic method of analysis used by, 89; in monetary economics, 60, 67, 69; on Quantity Theory of Money, 69, 84, 85 Marshall Plan, 108–11; European motives for accepting, 109–10; Prisoner’s Dilemma and, 109, 266–68, 267f; in Second World War recovery, 151, 245; US Congress on, 108, 109, 110, 251; US motives for offering, 108–10 Marx, Karl, 20 mass production, growth of, 116 May Committee, Report of (1931), 45 McKenna, Reginald, 64 Meade, James: The Balance of Payments, 16, 101, 259; and British devaluation, 46; in Circus group, 82, 83, 84–85, 88, 90, 258; on Common Market, 155; on international monetary 310 Index Meade, James (continued) system, 100, 101–2; junior colleagues in work of, 91; “Simplified Model of Mr Keynes’ System,” 258; and Swan diagram, 258, 259 Meade, Margaret, 83 Melchior, Carl, 60 Mellon, Andrew, 47 Merkel, Angela, 251–52 Merrill Lynch, 129 microeconomics, analytical method of, 89 Milesi-Ferretti, Gian Maria, 280n12 military, British: German rivalry with, 23–24; growth of funding for, 21 military, German: in bid for hegemonic power, 55, 57; British rivalry with, 23–24 military, Japanese, buildup of, 51, 52 military, US: in Cold War, 122, 133; future of, 253; GI Bill of Rights for, 140; Reagan’s expansion of, 133, 142; and unions, 122; in US deficit, 133 See also specific conflicts Miller, Marcus, 190–91 minimum wage, introduction in United States, 121 misery index, 125 Mitterrand, Franỗois, 162 Moggridge, Donald, 62, 101 monetary economics, 60, 69, 159, 269 monetary policy: in EMU, 7, 189–90, 198; versus fiscal policy, shift in emphasis on, 158–59 monetary system, international See Bretton Woods money: Quantity Theory of, 69, 73, 84, 85; in US politics, 137, 141, 148 money supply, evolution of Keynes’ understanding of, 86–87 Monnet, Jean, 152–53, 162 Moore, G E., 61 Morgenthau, Henry, 55 mortgages: in Global Financial Crisis of 2008, 143–44, 147–48; in mortgage-backed bonds, 129; in savings and loan crisis, 134–35; in tranches, 135–36, 143–44 multiplier, Kahn’s analysis of, 84–85, 258 Mundell, Robert, 223, 280n14 Mundell-Fleming model, 160, 280n14 Mussolini, Benito, 30 Napoleon Bonaparte, 22 Nash equilibrium, 268 Nation, The (magazine), 61 national debts See public debts national economies, role of world economy in recovery of, See also specific countries national income, in definition of external balance, 13 National Industrial Recovery Act (NIRA) of 1933 (US), 121 National Labor Board, US, 121 National Labor Relations Act (NLRA) of 1935 (US), 121, 122 National Labor Relations Board, US, 121, 122 National War Labor Board, US, 122 navy, British: German rivalry with, 23–24; growth of funding for, 21 navy, German, British rivalry with, 23–24 Nazi Germany, 53–57; aims of, 54–55, 57; anti-Semitism in, 57; coercion in, 55; destruction of democracy in, 54–55; Four Year Plans of, 54; hegemonic power sought by, 55, 57; origins of, 28, 57; rise of, 53–54; unemployment in, 6, 54 Netherlands: current account balance of, 10; in European Coal and Steel Community, 153; in European integration, 164; gold standard in, end of, 56; interwar balance of payments of, 37t; in Second World War, 57; wages in, under EMU, 182 New Deal, 52, 120–22 New Keynesian economics, 268–71; DSGE tradition in, 270–73; interventionism in, 159, 269–70 New Statesman, The (magazine), 61 New York Federal Reserve Bank, 136 New Zealand: British ties to, 63, 98, 154; in world economy after Second World War, 207 Nibelungenlied (epic poem), 27 NIRA See National Industrial Recovery Act Nixon, Richard, 125 Nixon Shock of 1971, 125 NLRA See National Labor Relations Act Nobel Prizes, 101, 103, 259, 280n14 Nordwolle, failure of, 41, 42 Norman, Montagu, 46, 70, 159 November Criminals, 27 Obama, Barack, 149 “Of the Balance of Trade” (Hume), 14 oil crises of 1970s, 124, 156 oil industry, innovations in, 119 open economies: in Swan diagram, 90, 257–66; in Washington Consensus, 131 Index Opium Wars, 115 optimal currency areas, 192–93 Orwell, George, 4–6, 49–50 output: evolution of Keynes’ understanding of, 84–85, 87; in Kahn’s multiplier analysis, 84–85 Pakistan, in world economy after Second World War, 207 Papen, Franz von, 52–53 Parliament, European, 163 Parliament, UK, Keynes in, 59 pattern bargaining, 123 Paulson, Henry, 146 pension plans, in US auto industry, 123 personal debt: need for reduction of, 1–2; rise of, in United States, 133; risk premiums of, personal savings, in domestic investment, Pigou, Arthur, 78, 83 Poland, interwar balance of payments of, 36 political integration, European, 154, 164–65, 167, 168 political parties See specific parties politics: UK, Keynes in, 59; unemployed voters and, 6; US, money in, 137, 141, 148 See also elections Polonius, 198 population, ratio of employment to, in United States, 4, 5f, 133 Portugal, EMU influence on, 173, 193 pound (British currency): in currency crises of 1930s, 41, 44–46; devaluation of, 46, 76–77; flight to, in 1920s, 34; restoration to prewar parity, 34–35 prices: in EMU, 181–82; evolution of Keynes’ understanding of, 96; in Keynes’ banana parable, 72–74, 84–85; in price-specie-flow model, 3, 14–16, 69; versus quantity of goods and services, 84; and real exchange rate, 243; stability of, in definition of internal balance, 12; in US golden age of economic growth, 124 See also deflation; inflation price-specie-flow model, 3, 14–16, 69 Principles of Economics (Samuelson), 90 Prisoner’s Dilemma, 266–68; in Global Financial Crisis of 2008, 232, 233, 240–41, 244; in Second World War recovery, 109, 266–68, 267f; summary of, 109 productivity: end of US advantage in, 127; in US auto industry, 122–23 311 profits, in US golden age of economic growth, 124 protectionism: in European Economic Community, 164; Keynes on, 77–78, 99–100 public (national) debts: causes of, 12–13, 172; concerns about, 1–2; in EMU, 180–81; in Global Financial Crisis of 2008, 234 See also specific countries public (national) deficits: in EMU, 180–81; in Global Financial Crisis of 2008, 234 public works, Keynesian expansion of public expenditure on, 78–81, 91–92 quantitative easing, 231–32, 233–34, 236 quantity of goods and services, versus prices, 84 quantity of money, evolution of Keynes’ understanding of, 86–87 Quantity Theory of Money, 69, 73, 84, 85 Ramsey, Frank, 61 Rape of Nanking, 51 Rathenau, Walter, 27 rating agencies, in Global Financial Crisis of 2008, 144 Reagan, Ronald, 125–27; education inequality under, 140; federal deficit under, 127, 133, 137, 138; income distribution under, 126; inflation under, 125; military expansion under, 133, 142 real estate boom, in savings and loan crisis, 135 See also housing real exchange rates See exchange rates, real recessions: change of hegemons as cause of, 18; German, of 1925–26, 38–39; ordinary versus balance-sheet, 17; US, of 1937, 56 red biennium, 30 Regulation Q, 156 Reichsbank, in German financial crisis of 1931, 41–43, 43f Reichstag: dissolution of, 28; Nazis in, 53 Reinhart, Carmen M., This Time Is Different, 17–18 renminbi: devaluation of, 52; East Asia financial crisis of 1997 and, 214; fixed exchange rate between dollar and, 205, 216–21, 226–29, 247; in Global Financial Crisis of 2008, 231–33, 238 reparations, First World War, 24–26; Dawes Plan for, 31–32, 33, 37; definition of damages for, 24; end of, 52–53; formal establishment of obligations, 31; French claim to, 30–31, 33; 312 Index reparations, First World War (continued) in German financial crisis of 1931, 41–44; Keynes’ condemnation of, 25–26, 57, 59, 60; versus Marshall Plan’s approach, 109; Weimar economic policies and, 28, 31; Young Plan for, 39, 42, 43f Republican Party (US), 149, 234–35 resources: European misallocation of, 118–19, 124; shortage of, in financial crises, 269; unemployment as waste of, 4–6 Reuther, Walter, 122, 123 Revision of the Treaty, A (Keynes), 60 risk premiums: definition of, 7; in EMU, 173–75, 184, 200–201; of government loans, 10; of personal and business loans, 7; sovereign, 173 Rist, Charles, 47 Robbins, Lionel, 59, 78 Robertson, Dennis, 79 Robinson, Austin, 82, 83, 84 Robinson, Joan, 82, 83, 88 robo-signers, 148 Rogoff, Kenneth S., This Time Is Different, 17–18 Romania, interwar balance of payments of, 36 Rome, Treaty of (1957), 108, 154 Roosevelt, Franklin D.: absence of international cooperation under, 56; contractionary policies ended by, 52; federal deficit under, 56; and gold standard, 48, 52; versus Hitler, 54–55; New Deal of, 52, 120–22; in Second World War, 94, 97; unions under, 121 Rothschild family, Credit Anstalt of, 40–41 Royal Commission on the Coal Industry, 33 Rubin, Howie, 129 Ruhr (Germany), Allied occupation of, 31, 33 Ruhrort (Germany), Allied occupation of, 31 Russell, Bertrand, 61, 65 Russia: current account balance of, 10; US hedge funds in, 136 Russian Revolution, working class in, 29 Salomon Brothers, 129 Samuelson, Paul, 89–90; Principles of Economics, 90 Sarkozy, Nicolas, 251 Saudi Arabia, current account balance of, 10 savings: evolution of Keynes’ understanding of, 83–89; during Great Moderation, 270–72; investment as equal to, 9; in Keynes’ banana parable, 72–75, 83–85 savings and loan (S&L) crisis, US, 134–35 schilling, 41 Schleicher, Kurt von, 53 Schuhknecht, Ludger, 195 Schuman, Robert, 153, 165 Schwartz, Anna, 47–48 Second World, after Second World War, 207 Second World War, 56–57; British financing of, 93–94; British preparations for, 57, 92, 93; German defeat in First World War and, 28, 113; GI Bill of Rights after, 140; international cooperation after, 107–13, 245–46, 266–68; international preparations for, 56–57; Keynes on external balance after, 94–105; LendLease program in, 94, 97–98, 100; Prisoner’s Dilemma in recovery after, 109, 266–68, 267f; US role in recovery after, 107–13, 151; US unions in, 122; world economy after, 206–9 securities, US regulation of, 121 Securities and Exchange Commission, US, 121 September 11, 2001, attacks, 149 SGP See Stability and Growth Pact “Simplified Model of Mr Keynes’ System” (Meade), 258 Singapore: financial crises of 1997 in, 211; in world economy after Second World War, 209 Singapore model, 93 Single European Act, 162 Skidelsky, Robert, 62 Smith, Adam, 130–31, 133 “snake in the tunnel,” 161 social effects: of unemployment, 4–6; of US income distribution, 132–33 socialism, in Britain, 33 social reforms, in Weimar Republic, 30 Solow growth model, 270 Soros, George, 166, 196, 200–201 South Africa, British ties to, 98 South Asia, in world economy after Second World War, 207, 208 South Korea: financial crises of 1997 in, 136, 174, 211, 214; in world economy after Second World War, 209 Sovereign Debt Restructuring Mechanism, 213 sovereign risks, in EMU, 173–75 Soviet Union: collapse of, 207; in world economy after Second World War, 207 Spain: banks of, 200; current account balance of, 10, 170–71, 171f; EMU influence on, 170–71, 171f, 173; in European integration, 162; fiscal policies of, 193–96, 198–99; recent unemployment in, 8f Index specie, definition of, 14 See also price-specieflow model specie standard, Hume’s theory of, 3, 14 Spence, Michael, 239 Sraffa, Piero, 82 Stability and Growth Pact (SGP), 174, 181–83, 247 stab-in-the-back legend (Dolchstosslegende), 27–28, 37, 54, 57 stagflation, global, in 1970s, 125–26 Stamp, Josiah Charles, 78 standstills, 212, 213 steam power, 21–22 steel industry: in Industrial Revolution, 23; pension plans in, 123 stimulus, domestic: in Swan diagram, 243, 260; in United States, 149, 233, 235 stock market, US: crash of 1929 in, 63; dot-com crash in, 142; rise of 1920s in, 36, 37; speculation on, in 1920s, 36 Strachey, Lytton, 62 strikes: after First World War, 30, 33; general, of 1926, 33; gold standard and, 71; during Second World War, 122; in United States, 122, 126 supply shocks, in 1970s, 125 supply-side tax cuts, 126 surpluses See specific types Sutherland, Alan, 190–91 Swan, Trevor, 17, 258, 259 Swan diagram, 257–66, 260f; Circus group and, 245, 258; equilibrium in, 90, 263–65; versus IS/LM model, 258–60, 259f; lesson of, 261–63; markets and variables of, 243, 260–61 Sweden: in European Monetary System, 166; interwar balance of payments of, 37t Switzerland: gold standard in, end of, 56; interwar balance of payments of, 37t Taft-Hartley Act of 1947 (US), 122 Tanzania, in world economy after Second World War, 208 tariffs, 52, 77–78 taxes: in East Asian financial crises of 1997, 211; EU power to collect, 201–2; in Global Financial Crisis of 2008, 233, 234; US cuts to, 126, 131, 141–42, 150; in Weimar Republic, 41, 53 Taylor, John, 157, 213, 219–20 Taylor Doctrine, 213 Taylor Rule, 157–58, 180, 220 313 Thailand: financial crises of 1997 in, 136, 174, 210, 214; in world economy after Second World War, 207, 209 Thatcher, Margaret: economic policies of, 125–27; on European Economic Community, 162; German reunification and, 166; monetary policies of, 208 Third World, after Second World War, 207–8 Thirty Years’ War, 55, 118 This Time Is Different (Reinhart and Rogoff ), 17–18 three-body problem of world economy, 206, 226–29, 247 time deposits, in currency crises of 1930s, 41, 42t Tinbergen, Jan, 103 Tirpitz, Alfred von, 23–24 Tories (Britain), 33 toxic assets, 10–11 toxic waste, 135 Trabant, 165–66 Tract on Monetary Reform, A (Keynes), 61 trade balance See balance of trade trade barriers: in 1930s, 52, 55; as gold-standard remedy, Keynes on, 77–78 trade deficits See balance of trade trade surpluses See balance of trade trade unions See unions tranches, mortgages sold in, 135–36, 143–44 transfer problem, 26 Treasury See British Treasury; United States Treasury Treatise on Money, A (Keynes): breakthroughs in thinking in, 85–86; Circus group’s discussion of, 82–85; employment in, assumptions about, 16, 74, 84; framework for external balance in, 92–93; Kahn’s multiplier analysis and, 84–85, 258; and Macmillan Committee, 16, 67, 82; problems with, 16, 73, 74, 83–84; savings versus investment in, 73, 83–86 Treaty of Detroit (1950), 123–24 Treaty of Rome (1957), 108, 154 Treaty of Versailles See Versailles Treaty Trinity College, Circus group’s meetings at, 83 Tripartite Agreement (1936), 55–56 Truman, Harry, 108, 110, 251 UK See Britain underemployment: in 1930s, 51–52; definition of, 51 314 Index unemployment: in 1930s, 49–52, 54; changes to meaning of, 50–51; definition of, 12; evolution of Keynes’ understanding of, 82, 87–89; future of, 1; gaps in Keynes’ understanding of, 81–82; in Keynes’ explanation of gold-standard mechanism, 68–76; in Keynesian expansion of public works, 78–81; versus “out of work,” 50–51; political effects of, 6; in price-specie-flow model, 15–16; recent rates of, 6–7, 8f; as sign of macroeconomic dysfunction, 11–12; social and personal consequences of, 4–6; waste of resources in, 4–6 See also specific countries and regions unions: British, 29, 30, 71, 126; European versus US, 120; impact of First World War on, 29–30, 33; in Second World War, 122; US, 120–24, 126, 132 See also strikes United Auto Workers, 122–23 United Kingdom (UK) See Britain United Nations, limitations of, 108 United States: Asian investment in, 138–40; balance of payments of, 10, 36, 138, 139f; in Bretton System, development of, 97–100; after Bretton Woods collapse, response to, 157–61; in Bretton Woods system collapse, 112, 155–57; Chinese economic relations with, 205, 216–21; Civil War in, 115, 124; contractionary policies in 1930s in, 47–48, 52; credit of, 7, 8; current account balance of, 10, 138, 139f, 218–19; in Dawes Plan for reparations, 31–32, 33, 37; versus EMU, formation of, 6–7; European economic relations with, 205–6, 220–26; on European integration, 168; financial sector of (See financial sector; stock market); in First World War, 24, 113; in German financial crisis of 1931, 41, 43, 46–48; in German recession of 1925–26, 38–39; Global Financial Crisis of 2008 in (See Global Financial Crisis); gold standard in, 35–36, 47–48, 52, 115, 125, 155; Great Depression in, 48, 56; as hegemon (See United States hegemony); history of economic growth in, 115–24, 117t; income in (See income distribution; wages); industrialization of, 23, 32, 115–16; inflation in, 36, 115, 122, 124–26, 156–57; interest rates in, 47, 128–29, 142–43, 150; recession of 1937 in, 56; regulation in, of banking, 56, 121, 156 (See also deregulation; Federal Reserve); savings and loan crisis in, 134–35; in Second World War, 57, 94, 97–98, 114, 122; stagflation of 1970s in, 125–26; stimulus in, 149, 233, 235; in three-body problem of world economy, 206, 226–29, 247; in Tripartite Agreement of 1936, 55; unemployment in, 4, 5f, 52; unions in, 120–24, 126, 132; in Vietnam War, 124, 155, 156; in world economy after Second World War, 207 United States Congress: influence of money in, 141; on Marshall Plan, 108, 109, 110, 251; on stimulus bills, 149 United States currency See dollar United States debt: concerns about stability of, 2; current size of, 10; in Global Financial Crisis of 2008, 234; growth of, since 1980s, 134, 137–38, 139f United States deficit: in 1930s, 56; current size of, 10; in Global Financial Crisis of 2008, 234; history of, since 1980s, 133–34, 134f, 137–38; military spending in, 133 United States hegemony, 107–50; Asian economic growth and, 125–27; in Chinese– United States relations, 205; duration of, 18, 19, 107, 113–14; economic growth in, 115–24, 117t; education in, decline of, 140–41; failures of, 36–37, 149–50; federal debt and deficit in, 133–38; financial sector in, 128–29; Global Financial Crisis of 2008 in, 143–50; income distribution in, 120, 126–33; industrialization in, 115–16; inflation of 1970s in, 124–26; loss of, 2, 18–19, 149–50, 253; LTCM crisis in, 136–37; Marshall Plan in, 108–11, 245; origins and emergence of, 33, 36–37, 55, 57, 105, 107, 114, 245; overview of history of, 18–19; in presidential election of 2012, 253; reluctance in, 36–37, 40, 55; savings and loan crisis in, 134–35; unions in, 120–24; in World War I recovery, 111, 113–14; in World War II recovery, 107–13, 151 United States Treasury: on British imperialism, 98; in international monetary system negotiations, 95 Versailles Treaty, 24–27; definition of damages in, 24; Keynes’ critique of, 25–26, 57, 59, 60; Keynes in negotiation of, 25, 59; reparations in (See reparations) Vietnam War, 124, 155, 156 Viner, Jacob, 155 Index Volcker, Paul, 125, 128, 208 voters, unemployed, See also elections wages: in British coal industry, 33; in EMU, 181–82; evolution of Keynes’ understanding of, 88–89, 96; in Keynes’ explanation of goldstandard mechanism, 68–76; minimum, 121 wages, US: in auto industry, 122–23; in financial sector, 128–29, 130f, 131; impact of international trade on, 127–28 See also income distribution Wagner, Robert, 121 Wagner Act See National Labor Relations Act Walters, Sir Alan, 190 Walters critique, 190–96 Washington Consensus: and Asian financial crises of 1997, 136; in Global Financial Crisis of 2008, 147, 148; and income distribution, 131; and military budget, 133; origins of, 128, 131 See also deregulation Wassenaar agreement, 182 Waterloo, Battle of (1815), 22 Watt, James, 22 Weidmann, Jens, 252 Weimar Republic (Germany), 27–44; anti-Semitism in, 27; balance of payments of, 36–37, 37t; budgetary problems of 1930s in, 41; deflationary policies of, 38–39, 48, 52–53; Dolchstosslegende in, 27–28, 37, 54; economic slump in, 38–40; expansionary policies in, 53–54; financial crisis of 1931 in, 41–44, 42t, 43f, 48; foreign investment in, 37–39; gold standard in, end of, 43–44; internal politics in, 27–28, 53; recession of 1925–26 in, 38–39; recovery of 1932 in, 53–54; reparations in (See reparations); social reforms in, 30 315 West Germany: in European Coal and Steel Community, 153; in origins of European integration, 161–62, 163–64; reunification of, 165–66, 168 White, Harry Dexter: at Bretton Woods, 104; in development of international monetary system, 95, 96, 103, 104; on need for international cooperation, 250 Wilson, Charles, 122 Wilson, Woodrow, 24 Wittgenstein, Ludwig, 61 Woolf, Virginia, 62 working class, impact of First World War on, 29–30 World Bank: limitations of, 108; origins of, 103–4, 105; purpose of, 112; in Second World War recovery, 111, 112, 113, 151 world depression, definition of, 12 world economy: collapse of 2008 in (See Global Financial Crisis of 2008); contraction of 2007–9 in, 1; downturn of 2008–9, 1, 229; as Keynes’ primary interest, 245; need for hegemonic power in, 2, 18, 105, 147, 244; in recovery of national economies, 2; after Second World War, 206–9; three-body problem of, 206, 226–29, 247; universal participation in, World Trade Organization (WTO), origins of, 100, 103–4, 151 World War I See First World War World War II See Second World War WTO See World Trade Organization Young Plan, 39, 42, 43f, 113–14, 276n29 zombie banks, 135 .. .The Leaderless Economy The Leaderless Economy Why the World Economic System Fell Apart and How to Fix It PETER TEMIN and DAVID VINES PRINCETON UNIVERSITY PRESS Princeton and Oxford... press.princeton.edu All Rights Reserved Library of Congress Cataloging-in-Publication Data Temin, Peter The leaderless economy : why the world economic system fell apart and how to fix it / Peter Temin and. .. it will take a little explanation to show how they are related We need to take you into the kitchen to show how the world economy is made Like all kitchens, this intellectual one is filled with