Evolution of money and capital pt 2

1. AGRICULTURAL RESOURCES & THE
WAR: ENTENTE COUNTRIES & U.S.A.
• ALL HAD SKILLED FARM POPULATIONS, HIGH
PRODUCTIVITY FARMS & RESERVES OF LAND
WHICH COULD EASILY BE BROUGHT INTO
PRODUCTION AS PRICES & PROFITS
INCREASED.
• FOOD SUPPLIES COULD BE INCREASED TO
MEET NEEDS OF ARMED FORCES &
CIVILIANS.

2. WORLD WAR I FARMING IN THE
U.S.A.

3. “ IN SUMMARY, TO BE POOR WHEN WAR BROKE
OUT WAS TO SUFFER THE CONSEQUENCES OF A
PEASANT AGRICULTURE, WHICH WAS
ESSENTIALLY A DEAD WEIGHT ON THE
MOBILISATION EFFORTS OF THE COUNTRY
CONCERNED. FOR THIS PURPOSE WE INCLUDE
GERMANY. THE PROCESS THAT RESULTED HAD
ITS INEXORABLE CONCLUSION IN URBAN
FAMINE, REVOLUTIONARY INSURRECTION AND
THE DOWNFALL OF EMPERORS.”
(BROADBERRY & HARRISON. 2005)

4. ECONOMIC PERFORMANCE OF
BRITISH EMPIRE IN THE WAR
• ECONOMY OF BRITAIN, MEASURED BY GROSS
DOMESTIC PRODUCT GREW BY 15% FROM
1913 TO 1918.
• ECONOMY MOVED FROM CIVILIAN TO
WARTIME NEEDS: ARTILLERY; 32,000
AIRCRAFT IN 1918, MACHINE GUNS; AND
MUNITIONS.
• BY 1916 BRITISH CAPITAL WAS PROPPING UP
ECONOMIES OF ITALY, RUSSIA & FRANCE.

5. BRITISH WAR EFFORT: WOMEN AT
MILLING MACHINES

6. BRITISH WAR EFFORT: PROPAGANDA

7. BRITAIN’S CAPITAL POSITION
• PROPPING UP OTHER ECONOMIES QUICKLY ERODED
BRITAIN’S GOLD & CAPITAL RESERVES.
• BY 1918 BRITAIN HAD TO BORROW FROM AMERICA $4
BILLION (1918 PRICES) ($350 BILLION IN TODAY’S PRICES).
• LONDON WAS FINANCIAL CENTRE OF THE WORLD & WAS
ABLE TO MOBILISE CAPITAL WITH EASE
• BRITAIN ALSO RAISED MONEY BY DIRECT TAXES ON
PROPERTY, AND RAISING BONDS, WHICH WERE HEAVILY
PROMOTED.
• BRITAIN ALSO BOUGHT ALL SOUTH AFRICAN &
AUSTRALIAN GOLD AT PRICES SET BY BRITISH
GOVERNMENT.

8. BRITAIN’S WAR BOND MARKETING

9. BRITAIN’S OIL POSITION
• BRITAIN’S MOST STRATEGIC COMMODITY WAS OIL
FOR:SHIPS, ROAD TRANSPORT AND INDUSTRIES.
• IN 1917 BRITAIN NEEDED 850 MILLION BARRELS, 85%
COMING FROM AMERICAN OIL PRODUCERS
• ROYAL NAVY GIVEN HIGHEST PRIORITY WITH OIL
SUPPLIED BY BRITISH PETROLEUM’S OILFIELDS IN
PERSIA.
• THE SINKING OF OIL TANKERS BY GERMAN U-BOATS
BECAME A HIGH PRIORITY & A MAJOR PROBLEM
UNTIL THE CONVOY SYSTEM INTRODUCED.

10. GERMAN UNRESTRICTED SUBMARINE
WAR ZONE. 1 FEB.1917 (SHADED)

11. ECONOMIC PERFORMANCE OF
FRENCH EMPIRE IN THE WAR
• GERMAN INVASION THROUGH NORTHHERN FRANCE IN
1914 CAPTURED 40% OF FRANCE’S HEAVY INDUSTRY,
ESPECIALLY COAL & STEEL.
• FRANCE SET UP SMALL FACTORIES ELSEWHERE,
EMPLOYING OLD MEN, WOMEN,YOUTH, ALGERIANS &
VIETNAMESE. THEY PRODUCED 200,000 SHELLS PER DAY.
• U.S. PROVIDED FOOD, COAL, STEEL, & INDUSTRIAL
MACHINERY.
• BRITAIN LOANED FRANCE $3BILLION (1918 PRICES) ($280
BILLION IN TODAY’S PRICES)
• FRANCE’S GROSS DOMESTIC PRODUCT SHRANK BY 36%,
1913 – 1918.

12. THE POSITION OF FRANCE IN WORLD
WAR 1

13. FRANCE LOST 1.4 MILLION MILITARY
DEAD + 2.2 MILLION WOUNDED
F
• 3

14. FRANCE’S CAPITAL POSITION IN THE
WAR
• FRANCE RAISED 55 MILLION POUNDS (1918
PRICES) ($1 TRILLION IN TODAY’S DOLLARS)
ON THE LONDON MARKET IN 4 BOND ISSUES.
• BONDS NOT BACKED BY GOLD, SO WHEN THE
FRENCH FRANC COLLAPSED DURING WAR,
BRITISH BOND HOLDERS LOST HEAVILY
• J.P. MORGAN (U.S. FINANCIER) CALLED IN TO
ASSIST BUT GOT INTO PROBLEMS WITH
FRENCH BANKERS.

15. ECONOMIC PERFORMANCE OF
RUSSIAN EMPIRE IN THE WAR
• IN 1914, ON PAPER, THE RUSSIAN ARMY WAS 1.4
MILLION MEN WITH A RECRUIT INTAKE OF 580,000.
QUANTITY RATHER THAN QUALITY.
• ONLY 2 NCOs PER COMPANY. WHEN KILLED EARLY,
MEN WERE LEADERLESS
• GENERAL STAFF OFFICERS IN CONSTANT
BUREAUCRATIC BATTLES, AND INADEQUATELY
TRAINED. ROYAL FAMILY LED MILITARY EXERCISES, AS
SHOWPIECES. SHORTAGES OF ARTILLERY.
• INADEQUATE RAILWAY SYSTEM.
• BATTLE OF TANNENBURG 30 AUGUST 1914, RUSSIA
LOST 145,000 KILLED OR CAPTURED.

16. RUSSIA.: THE HOME FRONT. 1915-
1917
• RUSSIA WAS A POOR COUNTRY WITH GROSS
DOMESTIC PRODCT ONE THIRD BRITAIN’S.
• RUSSIAN GOLD BACKED HALF BANKNOTES IN
CIRCULATION, CONTROLLED BY STATE BANK.
• PRIOR TO REVOLUTION RUSSIA HAD 1.5
BILLION ROUBLES IN GOLD IN 1917. BUT IN
THE CIVIL WAR, ROUBLE COLLAPSED & AND
INVESTORS FLED COUNTRY.

17. RUSSIA HOME FRONT CONT.
• 120,000 EMPLOYED IN DEFENCE INDUSTRIES BUT
MOSTLY YOUNG MALES WHO WERE CONSCRIPTED
LATER. REPLACED BY UNRELIABLE WORKFORCE OF
WOMEN, CHILDREN AND PRISONERS OF WAR.
• RUSSIAN FLEET BLOCKADED BY GERMAN NAVY.
NOTHING TO DO. FOREFRONT OF 1917 REVOLUTION.
• THREE QUARTERS OF RAILWAYS SINGLE TRACK.
SHORT 2000 LOCOMOTIVES & 80,000 WAGONS.
• ONE RIFLE FOR EVERY FIVE MEN
• AFTER MILITARY DEFEATS 1914/15 GERMANS
CAPTURED VAST QUANTITIES OF ARMS.

18. TSAR NICHOLAS II INSPECTS PALACE
GUARD AUGUST 1917

19. ECONOMIC PERFORMANNCE OF THE
GERMAN EMPIRE.
• IN THE LEAD UP TO THE WAR THE GERMAN
ECONOMY WAS STRONG & TECHNOLOGICALLY
ADVANCED.
• IT APPOINTED A BRILLIANT ADMINISTRATOR, WALTER
RATHENAU, WHO SET UP PROCESSES TO PROTECT
ACCESS TO RAW MATERIALS, TO AVOID BRITISH
NAVAL BLOCKADE.
• AFTER 1914 IT ORGANISED FLOWS OF MATERIAL
FROM CONQUERED REGIONS OF FRANCE & BELGIUM
• ESTABLISHED ERSATZ SUBSITUTES FOR SCARCE
MATERIALS.

20. GERMAN ECONOMIC PERFORMANCE.
2
• MARCH, 1915. GERMAN MILITARY TOOK
OVER RATHENAU’S DEPARTMENT.
• MILITARY CONTROL INEFFICIENT, EXCEPT IN
AIRCRAFT DESIGN & PRODUCTION.
• BY 1917 GOVERNMENT SPENDING ON
DEFENCE WAS 179 BILLION MARKS (1918
PRICES), 60% OF NATIONAL INCOME.
• ONLY 8% FROM TAXES. REST BORROWED
FROM BANKS OR GERMAN PEOPLE.

21. GERMAN ZEPPELIN WHICH BOMBED
LONDON

22. GERMAN ECONOMIC PERFORMANCE
3.
• GERMANY PAID FOR ITS IMPORTED RAW
MATERIALS OUT OF GOLD RESERVES.
• 1914. GERMANY IMPORTED $345 MILLION
(1918 PRICES) GOODS FROM AMERICA –
ABOUT ONE THIRD OF AMERICAN EXPORTS.
IN 1916 THIS TRADE CEASED WHEN
WOODROW WILSON ANNOUNCED AMERICA
WAS TO BECOME “THE ARSENAL OF
DEMOCRACY”

23. GERMAN ECONOMIC PERFORMANCE
4
• DESPITE MILITARY SETBACKS, GERMAN ECONOMIC
PERFORMANCE STABILISED AT 18% BELOW ITS 1913
LEVEL – ABOUT HALF THAT OF FRANCE.
• MOBILISATION TOOK SKILLED FARMERS & FOOD
PRODUCERS AWAY FROM FARMS. BY 1916/17
TURNIPS WHICH WERE STOCK FOOD WERE BEING
EATEN BY TOWN DWELLERS. MEAT WAS SCARCE.
• RAILWAYS WERE COMMANDEERED BY THE MILITARY
& THERE WAS A SHORTAGE OF COAL
• BY 1917 FOOD WAS IN VERY SHORT SUPPLY BOTH TO
THE MILITARY & CIVILIANS.

24. A FOOD QUEUE IN DUSSELDORP. 1917

25. AMERICAN ECONOMIC
PERFORMANCE IN WORLD WAR 1
• GROSS DOMESTIC PRODUCT ROSE BY 13%
BETWEEN 1913 & 1918.
• DUE IN PART TO MASSIVE GROWTH IN EXPORTS
TO BOTH SIDES OF THE WAR: $1173 MILLION IN
1914; $1495 MILLION IN 1915; & $2435 MILLION
IN 1916. THEREAFTER RESOURCES WERE
CHANNELLED TO LOCAL INDUSTRIES AS THE
COUNTRY BECAME “THE ARSENAL OF
DEMOCRACY”.
• BOTH SIDES PAID IN GOLD FOR IMPORTS,
CAUSING A GLUT OF GOLD IN U.S. TREASURY

26. AMERICAN CAPITAL IN WORLD WAR 1
• BANKER J.P.MORGAN WAS AN ENTHUSIASTIC
SUPPORTER OF ALLIED CAUSE.
• 1914 HE ORGANISED A LOAN OF $12 MILLION TO
RUSSIA; 1915 A LOAN OF $50 MILLION TO FRANCE.
BETWEEN 1916 & 1917 HE ORGANISED A
CONSORTIUM OF 2200 U.S. BANKS TO MAKE A $500
MILLION LOAN (1918 PRICES) ($50 BILLION TODAY’S
PRICES) TO ALL ALLIES
• AN INEXPERIENCED WASHINGTON GOVERNMENT
MADE SOME SPECTACULAR WAR PLANNING FAILURES
IN THE EARLY MONTHS OF 1917.

27. U.S. WAR BONDS MARKETING

28. THE POST-WAR ECONOMIC
CONSEQUENCES OF THE WAR
“ IF THE EUROPEAN CIVIL WAR IS TO END WITH FRANCE
AND ITALY ABUSING THEIR MOMENTARY VICTORIOUS
POWER TO DESTROY GERMANY AND AUSTRIA-
HUNGARY NOW PROSTRATE, THEY INVITE THEIR
OWN DESTRUCTION ALSO, BEING SO DEEPLY AND
INEXTRICABLY INTERTWINED WITH THEIR VICTIMS BY
HIDDEN PSYCHIC AND ECONOMIC BONDS.”
(J.M. KEYNES. “THE ECONOMIC CONSEQUENCES OF THE
PEACE”. 1920. WRITING ABOUT THE BRUTAL
HATREDS WHICH SURFACED AT THE PEACE
CONFERENCE, PROVIDING A FOUNDATION FOR
WORLD WAR 2.)

29. REPARATIONS PAID BY GERMANY
KEYNES ESTIMATED GERMANY’S TOTAL LIABILITY AT $40
BILLION (1920 PRICES). BUT REPARATIONS FINALLY
EXACTED ON SHATTERED GERMAN ECONOMY WERE:
1. GOLD RESERVES. OF TOTAL GOLD HELD BY REICHSBANK
OF $575 MILLION, $300 MILLION PAID OUT.
2. SHIPPING.TOTAL MERCHANT FLEET (WORTH $600
MILLION) GIVEN TO ALLIES.
3. TOTAL FOREIGN SECURITIES PORTFOLIO ($ 1.3 BILLION)
GIVEN TO ALLIES
4. PROPERTY IN CEDED TERRITORIES ($1.8 BILLION) PARTLY
ALLOCATED FOR REPARATIONS

30. GERMANY’S POST WAR CONDITIONS
ALLIES EXPECTED GERMANY TO TRADE ITS WAY BACK TO POSITION
WHERE IT COULD PAY ANNUAL REPARATIONS TRIBUTES – BUT IT
WAS A FAILED STATE, DUE TO CRUSHING LOSSES:
• SEVERANCE OF ALL OVERSEAS ASSETS
• CESSION OF 10% OF TERRITORY & POPULATION
• ONE- THIRD OF COAL
• THREE-QUARTERS IRON ORE
• 2 MILLION CASUALTIES
• STARVATION OF PEOPLE FOR 4 YEARS
• VAST WAR DEBT
• CURRENCY ONLY WORTH ONE-SEVENTH OF 1913 VALUE
• REVOLUTION AT HOME & BOLSHEVISM ON BORDERS

31. POST-WAR POVERTY IN GERMANY

32. LECTURE 12. THE GREAT
CONTRACTION (1929-1933). U.S. JOB
QUEUE IN THE “GREAT DEPRESSION”

33. MILTON FRIEDMAN: ECONOMIST &
CREATOR OF MONETARISM
“MONETARY THEORY IS LIKE A JAPANESE GARDEN. IT
HAS ESTHETIC UNITY BORN OF VARIETY; AN
APPARENT SIMPLICITY THAT CONCEALS A
SOPHISTICATED REALITY; A SURFACE VIEW THAT
DISSOLVES IN EVER DEEPER PERSPECTIVES. BOTH CAN
BE FULLY APPRECIATED ONLY IF EXAMINED FROM
MANY DIFFERENT ANGLES, ONLY IF STUDIED
LEISURELY BUT IN DEPTH. BOTH HAVE ELEMENTS
THAT CAN BE ENJOYED INDEPENDENTLY OF THE
WHOLE, YET ATTAIN THEIR FULL REALIZATION ONLY
AS PART OF THE WHOLE.”
(MILTON FRIEDMAN. “MONEY MISCHIEF. EPISODES IN
MONETARY HISTORY”)

34. “ A MONETARY HISTORY OF THE
UNITED STATES, 1867-1960”
• WRITTEN BY MILTON FRIEDMAN & ANNA SCHWARTZ.
• EVENTS OF 1929-1933 SEEN BY MANY AS “THE GREAT
CRASH” (OF THE NEW YORK STOCK MARKET), WHICH
PRECEDED THE “GREAT DEPRESSION”
• FRIEDMAN & SCHWARTZ REFER TO IT AS “THE GREAT
CONTRACTION” WHICH WAS PART OF A CYCLICAL
SEQUENCE OF ECONOMIC EXPANSION FOLLOWED BY
PERIODS OF CONTRACTION – SINCE 1860s IN THE U.S.
& THE WORLD.
• AFTER THE EVENTS OF 1929-1933 WE HAVE HAD A
SECOND GREAT CONTRACTION – WHICH HAS BEEN
CALLED “THE GLOBAL FINANCIAL CRISIS.” (2007-2010)

35. BUSINESS CONTRACTIONS BEFORE
1929-1933 IN THE UNITED STATES
• FROM 1873 TO THE FIRST MAJOR MONETARY CRISIS
IN THE UNITED STATES THERE WERE FIVE BUSINESS
“CONTRACTIONARY PERIODS”: 1873-1879; 1882-
1885; 1890-1891; 1899-1900; 1902-1903. ALL DUE TO
THE RAPID ECONOMIC GROWTH OF THE U.S.
• ALL WERE CHARACTERISED BY PERIODS OF VERY
STRONG ECONOMIC GROWTH – THEN BUBBLES OF
SPECULATIVE ACTIVITY, FRAUDSTERS, & IRRATIONAL
ECONOMICS – THEN COLLAPSE OF THE BUBBLES,
UNCOVERING OF FRAUD, & HEAVY LOSSES BY THE
IRRATIONAL INVESTORS.

36. THE PANIC OF 1907-1908
• THREE SIGNIFICANT EVENTS HAPPENED:
1. SPIN DOCTORING WAS USED TO QUELL PUBLIC CONCERNS
ABOUT THE INSTABILITY OF THE BANKING SYSTEM. “CRISIS”
WAS FAVOURED OVER “PANIC”. CLERGYMEN WERE ASKED BY
BUSINESS LEADERS TO PREACH OPTIMISTIC SERMONS.
2. THE U.S. ACQUIRED A CENTRAL BANK TO RESTORE LAW &
ORDER INTO BANKING SYSTEM.
3. A SHADY ANCESTOR OF TODAY’S “SHADOW BANK” ENTERED THE
MARKET – THE STATE TRUST COMPANY: WEALTH MANAGEMENT;
MOVING CORPORATE SECURITIES; TRUSTEES FOR ASSETS. TWO
OF THE BIGGEST WERE KNICKERBOCKER TRUST & TRUST
COMPANY OF AMERICA.

37. WALL STREET 1907

38. WALDORF-ASTORIA ON LEFT &
KNICKERBOCKER TRUST ON RIGHT.

39. KNICKERBOCKER DEPOSITORS
WANTING THEIR MONEY BACK

40. NEW YORK TIMES TELLS THE STORY
OF THE 1907 PANIC

41. SAGA OF KNICKERBOCKER & TRUST
COMPANY OF AMERICA.
• SPECULATORS IN COPPER PRICES.
• INVESTED HEAVILY IN COPPER BY CORNERING THE
MARKET. COPPER PRICES COLLAPSED –DEPOSITORS
OF KNICKERBOCKER DEMANDED THEIR MONEY – JP
MORGAN REJECTED A RESCUE PLAN & THE
PRESIDENT OF KNICKERBOCKER SHOT HIMSELF.
• TRUST COMPANY OF AMERICA ALSO SPECULATED IN
COPPER PRICES. JP MORGAN PROVIDED FUNDS
TRANSFERRED FROM U.S. TREASURY TO COVER ANY
THREATENED WITHDRAWALS FROM DEPOSITORS.
FIRST CASE OF “TOO BIG TO FAIL” POLICY?

42. 1907-1908 U.S. BANKING CRISIS
• 22,000 U.S. BANKS SEVERELY STRESSED IN MONETARY
CONTRACTION.
• 246 BANKS FAILED.
• LED EVENTUALLY IN DECEMBER 1913 TO THE FEDERAL
RESERVE ACT & CREATION OF THE FEDERAL RESERVE
BANK OF THE UNITED STATES OF AMERICA – “THE FED”:
“ AN ACT TO PROVIDE FOR THE ESTABLISHMENT OF FEDERAL
RESERVE BANKS, TO FURNISH AN ELASTIC CURRENCY, TO
AFFORD MEANS OF REDISCOUNTING COMMERCIAL
PAPER, TO ESTABLISH A MORE EFFECTIVE SUPERVISION OF
BANKING IN THE UNITED STATES, AND FOR OTHER
PURPOSES.”

43. THE FED’S CHARTER & FUNCTIONS
1914 - 1919
1. THE FED’S CHARTER:
• FEDERAL RESERVE BOARD TO OVERSIGHT FEDERAL RESERVE BANKS.
• 12 DESIGNATED FEDERAL RESERVE BANKS TO MANAGE FLOW OF
FEDERAL RESERVE MONEY.
• ISSUE CURRENCY BACKED BY U.S. GOLD RESERVES.
• THE FED’S BOARD TO HAVE 7 BOARD GOVERNORS WHO ARE
APPOINTED BY U.S. PRESIDENT.
• THE 12 DESIGNATED BANKS TO BE IN THE PRIVATE SECTOR. AND
WOULD BE FEDERALLY CHARTERED.
2. FROM 1914 - 1917 WAS A BOOM TIME FOR U.S. INDUSTRY AS IT
SUPPLIED BOTH SIDES OF WORLD WAR 1, AND WAS PAID IN GOLD,
MOSTLY - $5.3. BILLION (1917 $). BY 1919 U.S. HAD GONE FROM
DEBTOR TO CREDITOR NATION - $3.7 BILLION (1919 $) – ALL MANAGED
BY THE FED.
3. BY 1919, THE FED HAD SUPPLANTED BANK OF ENGLAND’S WORLD
BANKING STATUS, AND WOULD REMAIN SO.

44. 1920-1929. BUST THEN BOOM OF THE
ROARING TWENTIES
• 1919 SAW COLLAPSE OF COMMODITY PRICES, STAGNANT DEMAND,
GENERAL RECESSION & UNEMPLOYMENT.
• WEALTH ACCUMULATED BY PEOPLE IN WAR YEARS WENT INTO
COMMODITY SPECULATION & LAND – AIDED & ABETTED BY LOW
INTEREST RATES & EASY LENDING BY BANKS.
• IN ONE OF ITS FIRST INTERVENTIONS THE FED SET BORROWING RATES
FOR COMMERCIAL BANKS AT 6% - FOR BORROWINGS FROM FED BANKS.
1921 BORROWINGS DROPPED BY HALF. THE REMAINING BANKS
BORROWED AT A LOSS.
• ON 1 JUNE 1920 THE FED INCREASED THE BORROWING RATE TO 7%
WITH DISASTROUS CONSEQUENCES:
+ 63 BANKS FAILED IN 1919
+ 155 BANKS FAILED IN 1920
+ 506 BANKS FAILED IN 1921.
• MOST BANK FAILURES WERE IN RURAL AMERICA WHERE PRACTICES
WERE RUDIMENTARY & UNSUPERVISED BY FED.

45. THE ROARING TWENTIES
1921 - 1929
• THE SEEDS OF THE GREAT CONTRACTION WERE
SOWN IN THE PERMISSIVE POLICIES OF THIS
ERA – PERMITTED BY THE FED.
• THE BIG FIVE FACTORS LEADING TO THE BOOM
& BUST AFTER 1929:
1. RAPID ECONOMIC GROWTH & CONSPICUOUS
CONSUMPTION.
2. THE COMMERCIAL BANKS DIVERSIFIED INTO
UNCHARTED MARKETS: WEALTH
MANAGEMENT; UNDERWRITING & TRADING
IN SECURITIES (SHARES, BONDS ETC.)

46. ROARING TWENTIES CONT.
3. THE FED FREED ITSELF FROM CLOSE
OVERSIGHT BY THE U.S. TREASURY & ACTED
AS AN INDEPENDENT CENTRAL BANK
SHOULD. FRIEDMAN & SCHWARTZ SAW
THIS AS A FIRST NECESSARY STEP TOWARDS
DEVELOPING A NATIONAL MONETARY
POLICY.

47. ROARING TWENTIES CONT.
4. THE NEWLY INDEPENDENT FED HAD BOTH
DEFENDERS & CRITICS (ESPECIALLY
J.K.GALBRAITH):
“ THUS THE FEDERAL RESERVE SYSTEM WAS
HELPING TO FINANCE THE STOCK MARKET
BOOM. IT WOULD BE WRONG TO SAY THAT IT
WAS THE CAUSE; MEN AND WOMEN DO NOT
SPECULATE BECAUSE THEY HAVE THE MONEY TO
DO SO. BUT THE FEDERAL RESERVE SYSTEM DID
NOURISH THE SPECULATION, AND IT DID NOT
STOP IT.”

48. ROARING TWENTIES CONT.
5. FRIEDMAN & SCHWARTZ IDENTIFIED AN INTERNAL STRUGGLE
BETWEEN THE PRESIDENTIALLY APPOINTED FEDERAL RESERVE
BOARD & THE 12 BANKS, ON WAYS TO CONTROL SPECULATION
ON THE STOCK MARKET. THEY NOTE:
“…A NEAR COMPLETE SHIFT IN POWER FROM THE (12) BANKS IN
GENERAL AND THE NEW YORK BANK IN PARTICULAR, TO THE
(FEDERAL RESERVE) BOARD.”
(CF: PERSONAL ANIMOSITIES IN THE GLOBAL FINANCIAL CRISIS?)
GALBRAITH IDENTIFIES THE CHIEF VILLAIN AS BENJAMIN STRONG,
GOVERNOR OF THE FEDERAL RESERVE BANK OF NEW YORK –
AND DEFACTO HEAD OF THE FEDERAL RESERVE SYSTEM – UNTIL
HIS ILLNESS & DEATH IN 1928.

49. ROARING TWENTIES CONT.
LIKE ALL SPECULATIVE BUBBLES IN THE HISTORY OF
CAPITALISM IT PRODUCED A FINE CROP OF DODGY
PROMOTERS – OFTEN HAILED IN PUBLIC AS THE
FINANCIAL TITANS OF THEIR AGE; IT SAW THE INVENTION
OF THE PONZI SCHEME FRAUD, BY ONE CARLO PONZI:
“ THE HOLDING COMPANY PROMOTIONS TOGETHER WITH
INVESTMENT TRUSTS WERE THE WONDER OF THE 20s,
AND THOSE WHO BROUGHT THEM OFF WERE THE GIANTS
OF THE TIME… THE PRECURSORS OF THE
CONGLOMERATES, PERFORMANCE FUNDS, GROWTH
FUNDS, OFF-SHORE FUNDS AND REAL ESTATE
INVESTMENT TRUSTS…”
(J. K. GALBRAITH)

50. CPI DEFLATED DOW JONES
INDUSTRIAL AVERAGE 1910-2010

51. ROARING TWENTIES U.S.A.

52. THE RISE OF MOTOR CAR TRAVEL IN
THE U.S.A.

53. THE “GREAT CRASH” OF 1929
• THE ROARING 20s PEAKED IN AUGUST 1929, ALTHOUGH
INDUSTRIAL PRODUCTION WAS SLOWING FROM JUNE 1929.
• THE GREAT CRASH BEGAN ON 20 SEPTEMBER 1929 = GREAT
CONTRACTION 1929-1933 = GREAT DEPRESSION.
• 20 SEPTEMBER: FINANCIAL EMPIRE OF ENGLISH TYCOON
CLARENCE HATRY FALLS APART FOR FRAUDULENT ACTIVITIES:
UNAUTHORISED & FORGED SHARE CERTIFICATES. BRITISH COURT
GAVE LONG JAIL SENTENCE.
• ON THIS DAY A BOOSTED NEW INVESTMENT TRUST LAUNCHED AT
$104 IN NEW YORK STOCK EXCHANGE (NYSE). IT PEAKED AT $136
NEXT DAY.
• 22 SEPTEMBER. SOME WALL STREET GURUs WERE PREDICTING
THE END OF THE LONG RUNNING “BULL MARKET” (EXPLAIN)

54. BLACK OCTOBER 1929
• 10 OCTOBER. BAD DAYS ON WALL STREET BUT
MARKET RALLIES AS FINANCE INDUSTRY DID ITS
SUMS.
• 11 OCTOBER. MASSACHUSETTS DEPT PUBLIC
UTILITIES CONFRONTS BOSTON EDISON’S SHARE
FLOAT & LOOKS INTO “COMMERCIAL PRACTISES.”
• 12 OCTOBER. IVAR KRUEGER FRAUD REVEALED.
DOYEN OF FINANCIERS HAD A FRAUDULENT PYRAMID
OF HOLDING COMPANIES BASED ON BOND ISSUES
UNDERWRITTEN BY BLUE CHIP BOSTON FINANCIERS –
WHO DID NOT EVEN ATTEND BOARD MEETINGS.

55. BLACK OCTOBER 1929 CONT.
• 15 OCTOBER. EMINENT SPIN DOCTORS IN U.S. FINANCE INDUSTRY LED BY
IRVING FISHER TRY TO CONVINCE PUBLIC THAT U.S. STOCK MARKET HAD
ACHIEVED A GRAVITY-DEFYING HIGH PLATEAU. FISHER LOST HIS FORTUNE.
• FRIDAY 18 OCTOBER. WALL STREET TRADING STARTS TO WEAKEN.
• SATURDAY 19 OCTOBER. SECOND HEAVIEST TRADING DAY IN
HISTORY. 3.5 MILLION SHARES TRADED. PRICES FELL FURTHER,
ESPECIALLY MANUFACTURING.
• SUNDAY 20 OCTOBER. SUNDAY PAPERS PUBLISH SPIN DOCTORS’ RUMOUR
OF “ORGANISED SUPPORT” FROM WEALTHY “WHITE KNIGHTS” WITH LARGE
PORTFOLIOS.
• MONDAY 21 OCTOBER. 6.1 MILLION SHARES TRADED. TICKER TAPE
MACHINES SEIZED UP AT NOON – 1 HOUR BEHIND TRADING. NO ONE KNEW THE
REAL MARKET SITUATION.
• TUESDAY 22 OCTOBER. TRADING STABILISED & SPIN DOCTORS
PRONOUNCED THAT THE “MARKET FUNDAMENTALS WERE
SOUND”.

56. BLACK OCTOBER 1929 CONT.
• 23 OCTOBER. A GOOD DAY EXCEPT THE
LAST HOUR. IN THIS HOUR 2.6 MILLION
SHARES TRADED AS PRICES PLUMMETED. A
MID –WEST COLD FRONT CUT OFF
COMMUNICATIONS BETWEEN NEW YORK &
REST OF U.S. MARGINS TRADERS ASKED TO
COVER TRADES WITH CASH. MOST COULD
NOT. SPIN DOCTORS AGAIN RENEWED
RUMOURS OF “ORGANISED SUPPORT”

57. BLACK OCTOBER 1929
• TUESDAY 24 OCTOBER. 13 MILLION SHARES TRADED,
SOME PRICES SO LOW THAT SELLERS WERE
BANKRUPTED:
“ BY ELEVEN O’CLOCK THE MARKET HAD DEGENERATED
INTO A WILD, MAD SCRAMBLE TO SELL…BY ELEVEN-
THIRTY THE MARKET HAD SURRENDERED TO BLIND,
RELENTLESS FEAR. THIS INDEED WAS PANIC.”
(J.K. GALBRAITH)
AT 12.30 THE VISITORS GALLERY WAS CLOSED.
AT 1.30 A CONSORTIUM OF LARGE BANKS BEGAN
BUYING SHARES COMING ON THE MARKET, WHICH
SLOWED THE DECLINE IN SHARE PRICES TO A
MODEST 12 POINTS. THIS SET A PRECEDENT FOR
FUTURE COUNTERMEASURES.

58. TRADING FLOOR OF N.Y.S.E. ON 24
OCTOBER 1929 (A DRAWING)

59. BLACK OCTOBER 1929 CONT.
• FRIDAY 25 & SATURDAY 26. HEAVY
TRADING BUT PRICES STABLE & BUSINESS
LEADERS TALKED ABOUT “SOUND
FUNDAMENTALS”.
• MONDAY 28. 9.3 MILLION SHARES TRADED
BUT PRICES DECLINED BY MASSIVE 49
POINTS. NO ONE COULD CONTROL THE FALL.
BANKERS DECIDED TO LET PRICES FREE FALL.

60. 29 OCTOBER. BLACK TUESDAY OF
BLACK OCTOBER 1929
• THE WORST DAY IN WORLD STOCK MARKET HISTORY.
• WHOLE BLOCKS OF SHARES WERE FOR SALE AT ANY PRICE.
• “AIR HOLES” BEGAN TO APPEAR EVERYWHERE (I.E.: SHARES
WHERE NO BUYERS AT ALL)
• CONFUSION WHEN TICKER TAPE MACHINE TWO & HALF HOURS
BEHIND TRADING
• 16.3 MILLION SHARES SOLD.
• PRICE INDEX FALL WIPED OUT 12 MONTHS’ GAINS.
• NO “ORGANISED SUPPORT”
• BANKS BECAME FOCUS OF PUBLIC DERISION : “ THE VICTIM (OR
HIS CORPSE) IS MADE TO SUFFER ALL AVAILABLE INDIGNITIES.”
(J.K.GALBRAITH)

61. OUTSIDE N.Y.S.E. AFTERNOON OF
BLACK TUESDAY

62. BLACK TUESDAY

63. BLACK OCTOBER CONT. 30 & 31
OCTOBER
• FROM PRESIDENT HOOVER DOWN, THE SPIN
DOCTORS TRIED TO REASSURE THE PUBLIC
THAT THE U.S. “ECONOMIC FUNDAMENTALS”
WERE STRONG.
• THE TRADING SESSION ON THE N.Y.S.E. WAS
LIMITED TO 3 HOURS. 7 MILLION SHARES
WERE TRADED & PRICES RALLIED. THE
MOTOR INDUSTRY UPHELD THE INDUSTRIAL
SECTOR OF THE ECONOMY.

64. GREY NOVEMBER
• FRIDAY 1 & SATURDAY 2. WALL STREET WAS CLOSED.
• MONDAY 4. PRICES FELL BY 22 POINTS. THE FAVOURITE
INVESTMENT TRUSTS (NOW CALLED “CLOSED END
FUNDS”) OF THE 1920s BEGAN LOSING HEAVILY –
BECAUSE THEY HAD INVESTED IN EACH OTHER – CAUSING
THE CONTAGION TO SPREAD QUICKLY:
“ THEY BOUGHT THEIR OWN WORTHLESS STOCK. MEN HAVE
BEEN SWINDLED BY OTHER MEN ON MANY OCCASIONS.
THE AUTUMN OF 1929 WAS, PERHAPS, THE FIRST
OCCASION WHEN MEN SUCCEEDED ON A LARGE SCALE IN
SWINDLING THEMSELVES.”
(J.K. GALBRAITH)

65. GREY NOVEMBER
• WEDNESDAY 6 NOVEMBER. ANOTHER 3 HOUR
SESSION ON N.Y.S.E. SAW 6 MILLION SHARES
TRADED & A FURTHER PRICE DROP OF 37
POINTS. “BLUE CHIP” STOCKS WERE NOW BEING
DEVALUED.
• MONDAY 11 – WEDNESDAY 13. N.Y.S.E. STILL ON
SHORT HOURS, & PRICES CONTINUE TO FALL.
SUICIDES WERE NOW COMMONPLACE
ALTHOUGH IT WAS AN URBAN MYTH THAT THEY
WERE ALL JUMPING OUT OF WALL STREET
WINDOWS – ALTHOUGH SOME DID!!

66. A WALL STREET “JUMPER”

67. J.K. GALBRAITH’s REASONS FOR
SPECULATIVE BOOMS (OF ANY KIND!)
1. SOMETIME SOONER OR LATER, CONFIDENCE IN SHORT-RUN REALITY OF
INCREASING VALUES WOULD WEAKEN. PEOPLE WANT TO SELL & DESTROY
REALITY OF INCRAESING VALUES. THE NEW REALITY IS FALLING PRICES.
2. EASY CREDIT.
3. FAR MORE IMPORTANT IS THE MOOD – “A PERVASIVE SENSE OF CONFIDENCE &
OPTIMISM & CONVICTION THAT ORDINARY PEOPLE WERE MEANT TO BE RICH.”
4. “THE COMMON FOLKS BELIEVE IN THEIR LEADERS…SUCH A FEELING OF TRUST IS
ESSENTIAL FOR A BOOM.”
5. SAVINGS MUST BE PLENTIFUL, BUT SPECULATION MAY RELY ON BORROWED
FUNDS.
6. SPECULATION BREAKS OUT AFTER A SUBSTANTIAL PERIOD OF PROSPERITY
7. A SPECULATIVE OUTBREAK HAS A GREATER OR LESS IMMUNIZING EFFECT. THE
COLLAPSE AUTOMATICALLY DESTROYS THE EUPHORIC MOOD THAT GAVE RISE
TO THE SPECULATION

68. 1930 - 1933
• IF THE MELTDOWN OF THE N.Y.S.E. WHAT
FOLLOWED FROM 1930 – 1933 WOULD BRING
THE FINANCIAL SYSTEM, AND THEREBY GLOBAL
CAPITALISM TO THE BRINK OF DESTRUCTION.
• 10,000 U.S. BANKS FAILED.
• HOLDINGS IN CASH INCREASED BY 37%.
• BANK DEPOSITS DECREASED BY 47%.
• THOUSANDS OF CUSTOMERS LOST THEIR
DEPOSITS.

69. SHANTY TOWNS IN U.S. DEPRESSION

70. U.S. SOUP KITCHEN QUEUE

71. THOR STRIKES DOWN THE CAPITALIST
TRANSGRESSORS

72. “AN ANGRY GOD MAY HAVE ENDOWED
CAPITALISM WITH INHERENT
CONTRADICTIONS. BUT AT LEAST AS AN
AFTERTHOUGHT HE WAS KIND ENOUGH TO
MAKE SOCIAL REFORM SURPRISINGLY
CONSISTENT WITH IMPROVED OPERATION OF
THE SYSTEM.”
(J.K. GALBRAITH)

73. LECTURE 13. THE KEYNESIAN
REFORMATION OF GLOBAL FINANCE

74. WHO WAS JOHN MAYNARD KEYNES?
(LATER BARON KEYNES OF TILTON)
• BORN 1883: MOTHER WAS MAYOR OF
CAMBRIDGE FOR A TIME & FATHER WAS AN
ECONOMIST & CHIEF ADMINISTRATION
OFFICER OF CAMBRIDGE UNIVERSITY.
• J.M. KEYNES HAD A TRADITIONAL BRITISH
PATRICIAN CLASS UPBRINGING: ETON &
TRINITY COLLEGE CAMBRIDGE WHICH WAS
NOTED FOR ECONOMIC ERUDITION.

75. THE “DREAMING SPIRES”: TRINITY
COLLEGE (EST. 1546)

76. KEYNES, TRINITY COLLEGE
CAMBRIDGE & BLOOMSBURY GROUP
• KEYNES GRADUATED FROM CAMBRIDGE, 1905, IN MATHEMATICS. HE
STAYED ON IN CAMBRIDGE IN 1906, AS A POST-GRADUATE STUDENT
UNDER TWO OF THE GREATS IN ECONOMICS – ALFRED MARSHALL &
ARTHUR PIGOU. IN 1907 HE SAT FOR THE BRITISH CIVIL SERVICE EXAMS,
WHERE HE BARELY PASSED THE ECONOMICS EXAM. NEVERTHELESS HE
WAS APPOINTED TO A POSITION IN THE CIVIL SERVICE
• WHILST AT TRINITY HE MIXED SOCIALLY & INTELLECTUALLY WITH A
GROUP OF INTELLECTUALS, PHILOSOPHERS & ARTISTS WHO WOULD
BECOME INFLUENTIAL IN ENGLISH SOCIETY.
• IN 1905 THESE INDIVIDUALS MOVED TO LONDON AFTER GRADUATION &
SET UP A “CAMBRIDGE IN LONDON” GROUP WHICH MET EACH WEEK, IN
BLOOMSBURY (WEST CENTRAL LONDON).
• THEY REPRESENTED AN INTELLECTUAL ARISTOCRACY WHICH HAD
GROWN UP IN ENGLAND AROUND THE UNIVERSITIES IN THE 19TH
CENTURY. SOME UNIVERSITIES IN THE BRITISH EMPIRE – INCLUDING
SYDNEY – SOUGHT TO EMULATE THE CAMBRIDGE EXPERIENCE .

77. BLOOMSBURY CONT.
• THE BLOOMSBURY GROUP EXPANDED ITS MEMBERSHIP IN 1912, WHICH
INCLUDED THE WOOLFs, LYTTON STRACHEY, DESMOND MACCARTHY,
E.M. FORSTER & JOHN MAYNARD KEYNES. AS WITH ALL SUCH GROUPS,
INTELLECTUALS MOVED THROUGH IT AT DIFFERENT TIMES IN THEIR
CAREERS.
• THE GROUP ESTABLISHED STRONG SUPPORT THROUGHOUT THE BRITISH
ESTABLISHMENT FOR ITS BELIEFS:
– PERSONAL RELATIONSHIPS TRANSCENDING MONOGAMY
– ART FOR ART’S SAKE
– REJECTION OF CURRENT SOCIAL RITUALS AS RELICS OF VICTORIAN SOCIETY.
– A BELIEF IN PLEASURE.
– LEFT-LIBERAL POLITICS
– WOMEN’S SUFFRAGE
– POST-IMPRESSIONIST ART
– DESPITE A BREAK UP DURING WORLD WAR 1 THE GROUP REFORMED IN
STRENGTH IN THE 1920s (anti-imperialism, feminism, anti-fascism)

78. EARLY LIFE OF KEYNES
• KEYNES IMBIBED ALL THE VALUES OF THE BLOOMSBURY GROUP, AS A SENIOR MEMBER.
• THIS INFLUENCED HIM TO APPROACH ECONOMICS AS AN ETHICAL STUDY ( AS IT DID FOR MANY
OF THE GREATS UP TO THAT POINT)
• KEYNES ON “TRADITIONAL CAPITALISM”: ‘EXALTED SOME OF THE MOST DISTASTEFUL HUMAN
QUALITIES INTO THE POSITION OF THE HIGHEST VIRTUES”.
• KEYNES WAS BI-SEXUAL. MARRIED AT 42 YEARS TO LYDIA LOPOKOVA, OF THE BALLET RUSSES.
• AN ADVOCATE FOR WOMEN’S RIGHTS, ESPECIALLY CONTRACEPTION.
• BELIEVED IN CONCEPT THAT COMMUNITIES ARE NOT ‘ SENTIENT BEINGS’ & ‘NOTHING REALLY
EXISTS OR FEELS BUT INDIVIDUALS & INDIVIDUALISM ‘ IS AN INERADICABLE CORE OF
ECONOMICS.
• IN 1908 HE RETURNED TO CAMBRIDGE AS A LECTURER, THEN JOINED TREASURY IN 1914, TO
AVOID MILITARY SERVICE.
• HIS TALENT WAS QUICKLY REALISED AND HE WORKED HIS WAY INTO THE SENIOR RANKS OF
TREASURY, BY 1919. THIS PLACED HIM AS A MEMBER OF THE SUPREME ECONOMIC COUNCIL,
PARIS PEACE CONFERENCE. IT INCLUDED BRITAIN AS WELL & FOUR OTHER MEMBERS OF THE
ALLIES. ITS TASK WAS TO ADVISE THE CONFERENCE ON POST WAR ECONOMIC MEASURES TO BE
TAKEN.

79. “THE ECONOMIC CONSEQUENCES OF
THE PEACE” (1920)
• THIS 120 PAGE TREATISE WAS A DETAILED TECHNICAL ANALYSIS OF
THE BRUTAL HATREDS WHICH HAD SURFACED AT THE PEACE
CONFERENCE, AND WHICH WOULD CLEARLY PROVIDE A
FOUNDATION FOR WORLD WAR II.
• IN THE INTRODUCTION KEYNES WAS PRESCIENT: “IF THE
EUROPEAN CIVIL WAR IS TO END WITH FRANCE AND ITALY
ABUSING THEIR MOMENTARY VICTORIOUS POWER TO DESTROY
GERMANY AND AUSTRIA-HUNGARY NOW PROSTRATE, THEY
INVITE THEIR OWN DESTRUCTION ALSO, BEING SO DEEPLY AND
INEXTRICABLY INTERTWINED WITH THEIR VICTIMS BY HIDDEN
PSYCHIC AND ECONOMIC BONDS.”
• KEYNES ALSO POINTED OUT THAT THE ALLIED EXPECTATION THAT
GERMANY COULD TRADE HERSELF INTO A POSITION WHERE SHE
COULD PAY THE HUGE ANNUAL TRIBUTES TO THE ALLIES AS
REPARATIONS, IGNORED THE FACT THAT THE COUNTRY WAS
ALREADY A FAILED STATE.

80. GERMANY 1919 - 1923

81. 1919: ELDERLY GERMAN WOMEN
SEARCHING GARBAGE FOR FOOD

82. THE PALACE OF VERSAILLES

83. PARIS 1919. THE VERSAILLES ROOM
THAT CARVED UP GERMANY

84. HITLER’S REVENGE FOR 1919: FRENCH
SURRENDER SITE JUNE 1940

85. KEYNES AS POLICY PARIAH
• KEYNES’ VERY CRITICAL ANALYSIS OF THE VERSAILLES
PEACE PROCESS MADE HIM A PARIAH IN SENIOR
BUREAUCRATIC CIRCLES IN BRITAIN AND
PARTICULARLY FRANCE.
• HE WAS SHUT OUT OF BRITISH POLICYMAKING
BUREAUCRACIES AS WELL AS FINANCIAL AND OTHER
INSTITUTIONS WHICH INFLUENCED BRITISH POLICY.
• THIS FORCED HIS RESIGNATION AND HE RETURNED
TO CAMBRIDGE AS WELL AS TAKING DIRECTORSHIPS
IN FINANCIAL INSTITUTIONS EG: NATIONAL MUTUAL
& PROVINCIAL INSURANCE COMPANIES.

86. KEYNES THE MONEY MANAGER
• BACK AT CAMBRIDGE KEYNES WAS GIVEN THE TASK OF
MANAGING THE INVESTMENT PORTFOLIO OF KINGS
COLLEGE. THIS LED TO HIS APPOINTMENT AS INAUGURAL
BURSAR OF KINGS COLLEGE IN 1924.
• ACTIVITIES AT KINGS COLLEGE “CHEST FUND”
DEMONSTRATE HIS MONEY MANAGEMENT SKILLS.
• LIKE WARREN BUFFET HE MADE LARGE INVESTMENTS IN
WELL RESEARCHED SINGLE BUSINESSES ( BALANCE
SHEETS, PRODUCTS, SERVICES). HE GAVE UP TRYING TO
PREDICT BUSINESS CYCLE MOVEMENTS.
• INCREASED “CHEST FUND” FROM 1924 30,000 POUNDS
TO 380,000 POUNDS IN 1946 (12 % P.A.) WHEN L.S.E. FELL
BY 15% DUE TO 1929 CRASH & WORLD WAR II.

87. “TREATISE ON PROBABILITY” (1921)
• FOLLOWED GOTTFRIED LEIBNITZ’s IDEA (1704)
THAT PROBABILITY MAY BE LOOKED AT AS A
BRANCH OF LOGIC.
• WHERE KNOWLEDGE IS GAINED EITHER:
– DIRECTLY OR
– BY ARGUMENT.
THE THEORY OF PROBABILITY IS THUS CONCERNED
WITH THAT PART OF ARGUMENT WHERE RESULTS
MAY EITHER:
-CONCLUSIVE
- INCONCLUSIVE

88. “TREATISE ON PROBABILITY” CONT.
• THEORY OF SUBJECTIVE PROBABILITY IS LOGICAL BECAUSE IT IS
CONCERNED WITH DEGREES OF BELIEF WHICH IT IS RATIONAL TO
ACCEPT RATHER THAN CAPRICIOUS (KEYNES CALLS “SEAT OF
PANTS”) STATEMENTS NOT BASED ON ANY FACTS.
• CHAPTER 3 USES EXAMPLE OF TAKING UMBRELLA IN CASE OF
RAIN (QUOTE)
• ULTIMATELY KEYNES’ IDEAS REVOLVE AROUND THE QUESTION OF
UNCERTAINTY EG; MAKING INVESTMENTS WITH LONG LIFE SPANS
– USUALLY IRREVERSIBLE & THEREFORE FULL OF RISK IE: WE ARE
IN “REAL” TIME WHERE PAST SAMPLES HAVE LITTLE VALUE. WHEN
AN INVESTMENT IN “X” HAD A 75% PROBABILITY 12 MONTHS
AGO, IT HAS A LOW, UNKNOWN PROBABILITY IN 12 MONTHS
TIME . IS THIS THE CASE OF COAL?

89. COAL’s FUTURE: SUBJECTIVE
PROBABILITIES? (CLASS COMMENTS)

90. “A TREATISE ON MONEY” (1930)
• INTENDED TO BE HIS MASTERWORK BUT WOULD LEAD ON TO HIS
GREATEST CONTRIBUTION TO UNDERSTANDING MONEY &
CAPITAL, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND
MONEY (1936)
• WE CAN DRAW THE LINE BETWEEN “MONEY” & “DEBTS”.
MONEY…ANY COMMAND OVER PURCHASING POWER WHICH THE
OWNER HAS NOT PARTED WITH FOR A PERIOD OF 3 MONTHS.
DEBT AS (THAT WHICH) CANNOT BE RECOVERED FOR A LONGER
PERIOD THAN THIS …IT IS OFTEN CONVENIENT IN PRACTISE TO
INCLUDE IN “MONEY” TIME DEPOSITS WITH BANKS, AND
OCCASIONALLY SUCH INSTRUMENTS AS (EG.) TREASURY BILLS. AS
A RULE, I SHALL, AS IN MY ‘TREATISE ON MONEY’ , ASSUME THAT
MONEY IS CO-EXTENSIVE WITH BANK DEPOSITS.
(SEE CURRENT DEFINITIONS IN NATIONAL ACCOUNTS ETC.)

91. MONETARY INFLATION: KEYNES’
NEMESIS

92. “GENERAL THEORY OF EMPLOYMENT,
INTEREST & MONEY” (1936)
• “WHAT MADE THE BOOK , AND KEYNES REPUTATION , WAS HIS
INSTINCT THAT THERE WERE FORCES IN THE MODERN ECONOMY
THAT WERE FRUSTRATING THE MOST IMPORTANT ASSUMPTIONS
MADE BY MEN OF ORTHODOX MIND – THE ASSUMPTION THAT,
LEFT TO ITSELF AND GIVEN TIME, THE ECONOMIC SYSTEM WOULD
FIND ITS EQUILIBRIUM WITH ALL OR NEARLY ALL ITS WILLING
WORKERS EMPLOYED…WERE KEYNES RIGHT, THE HOPES OF THE
MONETARY RADICALS WOULD ALSO BE DESTROYED. ..MONETARY
POLICY (IN THE MID-1930s) WOULD NOT WORK. IT WAS PASSIVE
OR PERMISSIVE. WHAT WAS NEEDED WAS A POLICY THAT
INCREASED THE SUPPLY OF MONEY AVAILABLE FOR USE AND
THEN ENSURED ITS USE. THEN THE STATE OF TRADE WOULD HAVE
TO IMPROVE.”
(J.K.GALBRAITH)

93. KEYNES’ ECONOMY FLOW CHART

94. BIG IDEA 1. FROM THE GENERAL
THEORY: UNCERTAINTY
1. WE ASSUME THAT THE PRESENT IS A MUCH MORE SERVICEABLE GUIDE
TO THE FUTURE THAN A CANDID EXAMINATION OF PAST EXPERIENCE
WOULD SHOW IT TO HAVE BEEN HITHERTO. IN OTHER WORDS WE
LARGELY IGNORE THE PROSPECT OF FUTURE CHANGES ABOUT THE
ACTUAL CHARACTER OF WHICH WE KNOW NOTHING.
2. WE ASSUME THAT THE EXISTING STATE OF OPINION AS EXPRESSED IN
PRICES AND THE CHARACTER OF EXISTING OUTPUT IS BASED ON A
CORRECT SUMMING UP OF FUTURE PROPECTS…
3. KNOWING THAT OUR INDIVIDUAL JUDGMENT IS WORTHLESS,
ENDEAVOUR TO FALL BACK ON THE JUDGMENT OF THE REST OF THE
WORLD WHICH IS PERHAPS BETTER INFORMED. THAT IS , WE
ENDEAVOUR TO CONFORM WITH THE BEHAVIOUR OF THE MAJORITY
OR THE AVERAGE.”
(J. M. KEYNES)
HE GOES ON TO SAY THAT EVEN WHERE THE INVESTOR IS “BETTER
INSTRUCTED” , IT IS BETTER TO GO ALONG WITH GENERAL MARKET
SENTIMENT

95. WOULD YOU INVEST IN CHINA OR
STEER CLEAR? (CLASS DISCUSSION)

96. BIG IDEA 2. FROM GENERAL THEORY:
LONG TERM EXPECTATIONS
• MOST ECONOMISTS AGREE THAT “EXPECTATIONS” ARE AT
THE CENTRE OF THE GENERAL THEORY
• “IN PRACTICE WE HAVE TACITLY AGREED AS A RULE, TO
FALL BACK ON WHAT IS, IN TRUTH, A CONVENTION . THE
ESSENCE OF THIS CONVENTION THOUGH IT DOES NOT , OF
COURSE, WORK OUT SO SIMPLY – LIES IN ASSUMING
THAT THE EXISTING STATE OF AFFAIRS WILL CONTINUE
INDEFINITELY, EXCEPT INSOFAR AS WE HAVE SPECIFIC
REASONS TO EXPECT A CHANGE. THE ACTUAL RESULTS OF
AN INVESTMENT OVER A LONG TERM OF YEARS VERY
SELDOM AGREE WITH THE INITIAL EXPECTATION.”
(J. M. KEYNES)

97. IS NORTHCONNEX THE WHITE
ELEPHANT OF 2025? (CLASS DISCUSS)

98. BIG IDEA 3. GENERAL THEORY OF THE
LEVEL OF ECONOMIC ACTIVITY
IN THE KEYNESIAN MODEL OF THE MODERN
ECONOMY, NATIONAL INCOME, CONSUMPTION,
SAVINGS AND INVESTMENT ARE SHOWN TO
INTERACT IN A DYNAMIC WAY. A DEPRESSION IS
CAUSED BY SEVERELY REDUCED TOTAL
SPENDING IN AN ECONOMY, WHICH IN TURN
CAUSES INCREASES IN TOTAL UNEMPLOYMENT.
IN THIS SITUATION GOVERNMENTS MUST
INTERVENE TO INCREASE TOTAL SPENDING: BY
PUTTING SPENDING MONEY INTO CONSUMERS’
POCKETS.

99. ACCEPTANCE OF THE “GENERAL
THEORY”
• “THE KEYNESIAN IDEAS PASSED INTO PUBLIC POLICY BY WAY OF UNIVERSITIES. IF
THIS WAS A REVOLUTION, IT WAS NOT OF THE STREETS OR OF THE SHOPS BUT
OF THE SEMINAR ROOMS. KEYNES WAS TAKEN UP, IN THE MAIN, BY YOUNGER
SCHOLARS.”
(J.K.GALBRAITH)
• ESTABLISHED ECONOMISTS FOUND IT WRONG WHILE IT WAS BRILLIANTLY
DEFENDED BY R.F. KAHN AND JOAN ROBINSON.
• THE IDEAS FOUND THEIR WAY TO HARVARD UNIVERSITY. IN PARTICULAR ALVIN
HANSEN & SEYMOUR HARRIS.
• THE ROOSEVELT ADMINISTRATION WERE RECEPTIVE TO NEW IDEAS & THE
BOARD OF GOVERNORS OF THE FED. WERE PROMOTERS OF KEYNES’ IDEAS.
• ROOSEVELT HOWEVER WANTED TO “STOP THE DEFICITS” : “…YOU AND I KNOW
THAT A CONTINUATION OF THE HABIT (SPENDING MORE THAN EARNING)
MEANS THE POORHOUSE.” (PRESIDENT ROOSEVELT IN A “FIRESIDE CHAT” TO
AMERICA)
• WORLD WAR II SWEPT AWAY THE DEPRESSION WHEN GOVERNMENT FISCAL
POLICY ENSURED MONEY HAD TO BE BORROWED IN LARGE QUANTITIES BY THE
ALLIES AND SPENT ON WARTIME NEEDS (NEXT LECTURE)

100. KEYNES AND BRETTON WOODS
• 1944, BRETTON WOODS, NEW HAMPSHIRE 44
ALLIED & NEUTRAL NATIONS CAME TOGETHER
TO REORGANISE POST WAR GLOBAL FINANCE.
THEY WERE IN A BAD STATE: SOVIET UNION HAD
HORRENDOUS LOSSES IN PEOPLE & A WRECKED
ECONOMY; BRITAIN WAS CLOSE TO
BANKRUPTCY; FRANCE WAS A VASSAL NATION
TO GERMANY.
• THE DELEGATES TURNED TO KEYNES FOR
GUIDANCE OUT OF THE MESS.

101. BRETTON WOODS

102. BRETTON WOODS SYSTEM SIGNED BY
AGREEMENT, 22 JULY 1944
• RULES, INSTITUTIONS & PROCEDURES WERE SET
UP TO:
1. REGULATE INTERNATIONAL MONETARY
SYSTEM
2. ESTABLISHED THE INTERNATIONAL MONETARY
FUND (IMF)
3. ESTABLISHED INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT (IBRD)
LATER TO BE KNOWN AS THE WORLD BANK.

103. INTERNATIONAL MONETARY FUND
• ARTICLES OF AGREEMENT WERE:PROMOTE INTERNATIONAL
MONETARY CO-OPERATION; FACILITATE ECONOMIC EXPANSION,
BALANCED GROWTH AND TRADE; PROMOTE EXCHANGE
STABILITY; ASSIST THE ESTABLISHMENT OF A MULTILATERAL
SYSTEM OF PAYMENTS; MAKE RESOURCES AVAILABLE TO
MEMBERS (WITH SAFEGUARDS) TO CORRECT MALADJUSTMENTS
IN BALANCE OF PAYMENTS, WITHOUT DESTROYING THE
COUNTRY’S PROSPERITY.
• THESE OBJECTIVES WERE REACHED UP TO THE EARLY 1970s. IN
THE TURBULENT TIMES WHICH FOLLOWED, THE IMF CAME IN FOR
MUCH CRITICISM BECAUSE OF THE CONDITIONS IT APPLIED WHEN
GIVING ITS BAILOUT LOANS TO COUNTRIES WITH FINANCIAL
PROBLEMS (SEE GREECE!!!)

104. UNPOPULAR BUT EFFECTIVE

105. WORLD BANK
• ANOTHER GREAT INSTITUTIONAL LEGACY OF THE
KEYNESIAN REFORMATION IS THE WORLD BANK
COMPRISING: INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT (IBRD) AND
THE INTERNATIONAL DEVELOPMENT ASSOCIATION
(IDA). IT IS ALSO NOW A MEMBER OF THE WORLD
BANK GROUP & A MEMBER OF THE UNITED NATIONS
DEVELOPMENT GROUP.
• UNDER ITS ARTICLES OF AGREEMENT IT SHOULD
PROMOTE INVESTMENT, TRADE & CAPITAL
INVESTMENT IN DEVELOPING COUNTRIES, & TO
REDUCE POVERTY

106. KEYNES’ LEGACY
• “KEYNES WAS TURNED INTO AN EPITHET – ‘KEYNESIAN’ –
WHICH HAS IDENTIFIED HIM WITH DEFICIT FINANCE.
KEYNESIAN IS ONE OF THE WORDS USED TO DESCRIBE
THE RUNNING OF A BUDGET DEFICIT IN ORDER TO PAY
FOR GOVERNMENT ACTIVITIES – RUNNING SCHOOLS,
HOSPITALS, THE ARMED FORCES…HE ADVOCATED A
PUBLIC WORKS PROGRAMME OF HOUSEBUILDING AND
ROADBUILDING IN ORDER TO STIMULATE THE NATIONAL
ECONOMY BY PUMPING MORE MONEY AROUND (IN THE
DEPRESSION 1930s).BUT HE SAW SUCH MEASURES AS
INTERIM DEVICES TO MEET THE PARTICULAR CRISES AND
AFFIRMED THAT BUDGETS SHOULD BE BALANCED IN
ORDINARY TIMES.”
(THE GUARDIAN)

107. KEYNESIANISM

108. KEYNES LEGACY
“ KEYNES BELIEVED IN SECOND THOUGHTS. HE DID
NOT BELIEVE IN MENTAL STANDSTILLS. HE KNEW
THAT MOST OF HIS IDEAS HAD ONLY TRANSIENT
VALUE. HE WANTED TO DISMANTLE
CONVENTIONAL HABITS AND ASSUMPTIONS,
AND TO RETHINK PREVIOUS SYSTEMS OF
THOUGHT – INCLUDING HIS OWN. HE HAD THE
COURAGE TO TREAT ECONOMICS AS A MATTER
OF TIME AND TEMPER.”
(THE GUARDIAN)

109. KEYNES LEGACY
“ THE KEYNESIAN REMEDY WAS ASYMMETRICAL;
IT WOULD WORK AGAINST UNEMPLOYMENT
AND DEPRESSION BUT NOT IN REVERSE
AGAINST INFLATION. IT WAS A DISCOVERY THAT
WAS ONLY VERY SLOWLY AND RELUCTANTLY
ACCEPTED…THERE ARE OTHER PROBLEMS.
KEYNESIAN SUPPORT TO THE ECONOMY HAS
COME TO INVOLVE HEAVY SPENDING FOR
ARMS…THE AGE OF KEYNES WAS FOR A TIME
BUT NOT FOR ALL TIME.”
(J. K. GALBRAITH)

110. KEYNES LEGACY
“ LITTLE OF KEYNES ‘S ORIGINAL WORK SURVIVES IN
MODERN ECONOMIC THEORY. HIS IDEAS HAVE BEEN
ENDLESSLY REVISED, EXPANDED, AND CRITIQUED.
KEYNESIAN ECONOMICS TODAY, WHILE HAVING ITS
ROOTS IN THE ‘GENERAL THEORY’, IS CHIEFLY THE
PRODUCT OF WORK BY SUBSEQUENT ECONOMISTS
INCLUDING: JOHN HICKS, JAMES TOBIN, PAUL
SAMUELSON, ALAN BLINDER. ROBERT SOLOW,
WILLIAM NORDHAUS, CHARLES SCHULTZE, WALTER
HELLER, AND ARTHUR OKUN.”
(CONCISE ENCYCLOPEDIA OF ECONOMICS)

111. KEYNES LEGACY
“ THE STUDY OF ECONOMETRICS WAS
CREATED, IN LARGE PART, TO EMPIRICALLY
EXPLAIN KEYNES’S MACROECONOMIC
MODELS. YET THE FACT THAT KEYNES IS THE
WELLSPRING FOR SO MANY ECONOMISTS IS
TESTAMENT TO THE MAGNITUDE AND
INFLUENCE OF HIS IDEAS.”
( CONCISE ENCYCLOPEDIA OF ECONOMICS)

112. KEYNES LEGACY
“ BUT THANK GOODNESS, THE WORLD OF PURE
PROBABILITY DOES NOT EXIST EXCEPT ON PAPER OR
PERHAPS AS A PARTIAL DESCRIPTION OF NATURE. IT HAS
NOTHING TO DO WITH BREATHING, SWEATING, ANXIOUS,
AND CREATIVE HUMAN BEINGS STRUGGLING TO FIND
THEIR WAY OUT OF THE DARKNESS.
THAT IS GOOD NEWS, NOT BAD NEWS. ONCE WE
UNDERSTAND THAT WE ARE NOT OBLIGED TO ACCEPT THE
SPIN OF THE ROULETTE WHEEL OR THE CARDS WE ARE
DEALT, WE ARE FREE SOULS. OUR DECISIONS MATTER. WE
CAN CHANGE THE WORLD. KEYNES’S ECONOMIC
PRESCRIPTIONS REVEAL THAT AS WE MAKE DECISIONS WE
DO CHANGE THE WORLD.”
(PETER L. BERNSTEIN)

113. KEYNES LEGACY: FREEDOM TO
CHOOSE

114. LECTURE 14. MONEY AND WORLD
WAR 2

115. HOW ALLIES PAID FOR WORLD WAR 2
“ IN BOTH COUNTRIES (BRITAIN & UNITED STATES) THE
ECONOMIC PLANNING REFLECTED STRONGLY THE
NEW KEYNESIAN FISCAL DESIGN. WHAT WAS URGED
AS THE POLICY AGAINST PEACETIME UNEMPLOYMENT
WOULD WORK AGAINST WARTIME INFLATION;
INSTEAD OF PUBLIC EXPENDITURE TO INCREASE
EMPLOYMENT THERE WOULD NOW BE HIGHER TAXES
TO RESTRICT CIVILIAN DEMAND AND CONSUMPTION.
THIS RESTRICTION WOULD MAKE MANPOWER,
PLANT AND MATERIALS AVAILABLE FOR MILITARY
USE. THIS WAS THE HEART OF THE MATTER; ALL ELSE
WAS DETAIL.”
(J.K. GALBRAITH)

116. WHY ADOLF HITLER ?
“ DEMAGOGIC SKILL CATAPULTED HITLER TO THE
LEADERSHIP OF GERMANY AND REMAINED HIS STOCK IN
TRADE THROUGHOUT HIS CAREER. WITH THE INSTINCTS
OF AN OUTCAST AND AN UNERRING EYE FOR
PSYCHOLOGICAL WEAKNESSES, HE SHUNTED HIS
ADVERSARIES FROM DISADVANTAGE TO DISADVANTAGE,
UNTIL THEY WERE THOROUGHLY DEMORALIZED AND
READY TO ACQUIESCE TO HIS DOMINATION…BUT FOR
HIM, THE COLLAPSE OF THE HOUSE OF CARDS WHICH
REPRESENTED THE VERSAILLES INTERNATIONAL ORDER
MIGHT HAVE PROCEEDED IN A PEACEFUL, OR AT LEAST
NONCATASTROPHIC FASHION.”
(HENRY KISSINGER. “DIPLOMACY”)

117. THE DEMAGOGUE

118. WHY TOJ0 & EMPEROR HIROHITO ?
• IN THE NAME OF THE EMPERORS OF MEIJI, JAPAN
MODERNISED FROM 1860s.
• ALSO BUILT AN ARMY & NAVY WHICH MATCHED ANY IN
EUROPE, & MADE IT ANSWERABLE ONLY TO THE
EMPEROR, AS SUPREME COMMANDER.
• CREATED A MILITARISTIC SOCIETY.
• CREATED FOR ASIA THE GREATER EAST ASIA CO-
PROSPERITY SPHERE TO COVER CONQUESTS
• 1937. CREATED ARMY OF 700,000 & MIYAZAKI PLAN FOR
TOTAL WAR OF ASIAN CONQUEST FOR 3 YEARS.
• 1936 JOINED ITALY & GERMANY IN A PACT.
• 1937. BEGAN BRUTAL INVASION OF CHINA, WHICH
LASTED UNTIL 1945.

119. HIROHITO. SUPREME COMMANDER
OF IMPERIAL JAPANESE FORCES

120. THE WAR IN EUROPE’S BEGINNINGS
• GERMANY HAD INVENTED A NEW WAR-FIGHTING
DOCTRINE:
BLITZKREIG (LIGHTNING WAR)
+
BLITZARTIG SCHNELL (QUICK AS LIGHTNING)
• 1 SEPTEMBER 1939 GERMANY INVADED POLAND
• 22 JUNE 1941, “OPERATION BARBAROSSA” WAS
LAUNCHED BY GERMANY AGAINST SOVIET UNION &
REACHED MOSCOW BY 2 DECEMBER 1941, WHERE IT
WAS STOPPED.

121. SOVIET PRISONERS OF WAR
CAPTURED IN “BARBAROSSA”

122. WAR IN THE PACIFIC’S BEGINNINGS
• 7 DECEMBER 1941 JAPAN LAUNCHED A SURPRISE ATTACK ON
PEARL HARBOUR BASE OF U.S. PACIFIC FLEET TO SINK AIRCRAFT
CARRIERS (UNSUCCESSFUL), & OTHER WARSHIPS (SUCCESSFUL).
DECISIVE BATTLE OF 20TH CENTURY.
• JAPANESE NAVY HAD TO MEET U.S. NAVY IN DECISIVE BATTLE OF
MIDWAY ISLAND, 4 JUNE 1942. JAPAN LOST:4 AIRCRAFT
CARRIERS, 1 HEAVY CRUISER, 280 AIRCRAFT & 100 OF THEIR
WORLD’S BEST AVIATORS. ENDED JAPAN’S NAVAL AMBITIONS
• 7 DECEMBER 1941, IMPERIAL JAPANESE ARMY INVADED MALAYA,
INFLICTED WORST DEFEAT IN BRITISH ARMY’S HISTORY, WENT ON
TO CONQUER BURMA, BUT STOPPED AT KOHIMA
• CONQUERED THE REST OF SOUTH EAST ASIA, BUT STOPPED AT
KOKODA.
• CONQUERED MANY PACIFIC ISLANDS BUT STOPPED AT
GUADALCANAL.

123. RAID ON PEARL HARBOUR

124. BIRTH OF WEAPONS OF MASS
DESTRUCTION (WMD)
• WEAPON OF CHOICE IN 21ST CENTURY IS WMD.
• GERMAN AIRSHIP RAIDS OVER BRITAIN, 1915-1918, WERE MANY,
BOMBED CIVILIANS BUT ONLY 2908 CASUALTIES.
• V-1. GERMAN UNMANNED EXPLODING ROCKET, (FIRST CRUISE
MISSILE)
• FIRED IN SALVOs OF 100, HIGH SPEED, LOW ALTITUDE. JUNE-
AUGUST 1944 KILLED 19,800 CIVILIANS
• V-2. GERMAN ROCKET. 2 TONS AMATOL. 5000 FT/SEC., RANGE 220
MILES, COULD NOT BE HEARD OR SEEN. SEP. 1944 – MAY 1945
KILLED 9224 RESIDENTS OF LONDON.
• GERMANS WORKING ON V-3 SUPER-GUN, TO LAUNCH 200 SHELLS
PER HOUR ON LONDON.
• U.S. & U.S.S.R. 1945. SET CAPTURED SCIENTISTS TO WORK ON
OWN PROJECTS

125. GERMAN V-1 “FLYING BOMB”

126. ALLIES vs AXIS POWERS
THE BALANCE SHEETS: 1938
• ALLIES: U.K., FRANCE, U.K. DOMINIONS,
CZECHSLOVAKIA, POLAND, FRENCH
COLONIES, U.K. COLONIES.
• ALLIES POPULATION: 690 MILLION
• ALLIES G.D.P.: $1 TRILLION (1990)
• ALLIES TERRITORY: 47.6 M. SQ. KMS.

127. ALLIES vs. AXIS POWERS
THE BALANCE SHEETS:1938
• AXIS POWERS: GERMANY, AUSTRIA, ITALY, JAPAN, &
COLONIES OF ITALY & JAPAN.
• AXIS POPULATION:259 MILLION
• AXIS G.D.P.: $ 683 MILLION (1990)
• AXIS TERRITORY: 6.3 M. SQ. KMS.
BRITAIN & EMPIRE ONLY: 1939-42
• STILL AN ADVANTAGE OVER AXIS OF 2:1 IN
POPULATION & ECONOMIC POSITION OF PARITY.
• UNPREPARED BRITAIN HAD TO SURVIVE 3 YEARS OF
ONSLAUGHTS OF GREATEST MILITARY FORCES IN
HISTORY

128. EUROPE 1942

129. NAZI ECONOMY. 1939-1945
• NAZI CONQUERED ECONOMIES GEARED TO SUPPORTING
FURTHER CONQUESTS.
• AS IN WW1, FOOD SUPPLY WAS CRITICAL.
• ONLY SUGAR, COFFEE 7 CHOCOLATE SHORT AFTER BRITISH NAVAL
BLOCKADE.
• FOOD SUPPLIES IN GERMANY WERE ADEQUATE UNTIL 1944 FROM
CONQUESTS.
• FROM 1944 STRATEGIC BOMBING OF TRANSPORT NETWORK &
RED ARMY SCORCHED EARTH AS THEY RETREATED LED TO SEVERE
SHORTAGES, THEN STARVATION.
• GERMAN ARMY RUTHLESS IN REQUISIONING FOOD EG: DUTCH
HONGERWINTHUR 1944/45 AND MASS STARVATION.

130. DUTCH HONGERWINTHUR 1944

131. PETROLEUM SUPPLIES, PLOESTI
1939-1944 (ONE THIRD) & COAL GAS:
NAZI COAL GAS PLANT, POLAND MINE

132. NAZI LOOTING OF WEALTH OF
CONQUERED LANDS (1 OF 1500)

133. ECONOMIC MANAGERS OF THE
THIRD REICH
HJALMAR SCHACHT ( 1933-1942)
• HIS FINANCIAL GENIUS ABLE TO RAISE FUNDS TO
BOLSTER HEAVY NAZI SPENDING ON
INFRASTRUCTURE & THEN MILITARY.
• RESTRUCTURED BANKING IN CONQUERED
COUNTRIES TO SIPHON WEALTH TO BERLIN.
• ANTI- NAZI STATEMENTS SAW DECLINE IN
INFLUENCE.
• SENT TO DACHAU CONCENTRATION CAMP 1943.

134. ALBERT SPEER: MINISTER OF
ARMAMENTS FOR TOTAL WAR & 10
MILLION SLAVE LABOUR FACTORIES

135. JAPANESE ECONOMY 1941-1945
FINANCE MINISTER KOREKIYO TAKAHASHI
• BROUGHT JAPAN OUT OF GREAT DEPRESSION WITH
“TAKAHASHI ECONOMIC POLICY”
• SOPHISTICATED MANAGEMENT OF EXCHANGE RATES,
MONETARY/FISCAL POLICY.
• MILITARY SPENDING ACCELERATED.
• BOND ISSUES FOR MILITARY INVASION OF CHINA
RESTRAINED.
• SEEN AS IMPEDIMENT TO JAPAN’S MILITARY AMBITIONS.
ASSASSINATED 1936.
• ECONOMIC POWER WENT TO NAVY AND ARMY: MILITARY
COMMAND ECONOMY.

136. MILITARY COMMAND ECONOMY:
1937 - 1945
• NAVY COMPETED WITH ARMY.
• NAVY BUILT 589 NAVAL VESSELS FROM 1939
– 1945, INCLUDING LARGEST BATTLESHIP.
• IN 1944 BUILT 248 VESSELS TO REPLACE
LOSSES
• PROVIDED CONTINUOUS SUPPLY OF
ARMAMENTS TO 6 MILLION ARMED FORCES.
• MILITARY SPENDING: 22% IN 1939 TO 76% IN
1944

137. MASS PRODUCTION OF MIDGET
SUBMARINES (150 TONS)

138. “ASIA FOR ASIANS” PLAN WAS A
“LAND DISPOSAL PLAN”
• AS LANDS WERE CONQUERED PROVIDED RESOURCES TO JAPAN.
• ADMINISTERED BY GOVERNORS-GENERAL &
GOVERNORS:FORMOSA, SOUTH SEAS, MELANESIA, EAST PACIFIC,
AUSTRALIA (2 MILL. JAPANESE COLONISTS), NEW ZEALAND,
CEYLON, ALASKA, CENTRAL AMERICA
• 6.5 MILLION TONS OF BIG CARGO SHIPS & THOUSANDS SMALL
CRAFT CARRIED FOOD & MATERIALS TO JAPAN.
• THIS FLEET VIRTUALLY DESTROYED BY AIRCRAFT, SUBMARINES,
MINES BY 1943/44
• 1945 JAPAN READY TO MOBILISE WHOLE CIVILIAN POPULATION IN
A LAND WAR ON THE JAPANESE HOMELAND (AMERICANS
CALCULATED 500,000 CASUALTIES ON KYUSHU ALONE)

139. GREATER EAST ASIA CO-PROSPERITY
SPHERE

140. HIROSHIMA

141. SOVIET ECONOMY 1941 - 1945
• STALIN ORDERED A SWITCH TO DEFENCE
SPENDING EVEN AS SOVIETS WERE TRADING
WITH GERMANY FOR NEW INDUSTRIAL PLANTS.
• 1936 DEFENCE SPENDING 16% OF NATIONAL
INCOME. BY 1943 REACHED 61%.
• VAST ARRAY OF WEAPONS PRODUCED BUT
OBSOLETE.
• STALIN HAD DECIMATED RED ARMY OFFICERS.
SURVIVORS HAD NO IDEA OF WAGING WAR
AGAINST GERMANY.

142. OPERATION BARBAROSSA
• GERMAN INVASION OF RUSSIA 22 JUNE 1941.
STOPPED BY RED ARMY OUTSIDE MOSCOW, BUT
IT HAD LOST 3 TO 4 MILLION TROOPS KILLED,
WOUNDED OR CAPTURED.
• DANGEROUS ARCTIC CONVOYS BROUGHT
SUPPLIES TO MURMANSK.
• RED ARMY HELD ON AT MOSCOW, LENINGRAD
& STALINGRAD.
• RED ARMY TURNED TIDE AT BATTLE KURSK,
AUGUST 1943. RED ARMY OF 2.6 MILL.
CRUSHED GERMAN ARMY OF 1 MILL.

143. BATTLE OF KURSK: THE “BURNING
BULGE”

144. RED ARMY MAY 1945
• 6.5 MILLION TROOPS PLUS THOUSANDS OF GUNS,
TANKS & AIRCRAFT
• HAD RE-TAKEN THE LAND IN EASTERN EUROPE
CONQUERED BY THE GERMANS.
• GERMAN ARMY’S SCORCHED EARTH HAD LEFT
EASTERN EUROPE A WASTELAND.
• WHAT WAS LEFT WAS LOOTED BY RED ARMY
• IN BETWEEN MILLIONS MEN, WOMEN, CHILDREN
DISPLACED BY WAY.
• 36.5 MILLION KILLED IN EUROPEAN WAR, 19 MILLION
BEING CIVILIANS

145. THE IRON CURTAIN 1945

146. BRITISH ECONOMY 1939-1945
• BRITISH G.D.P. 1939 $287 BILLION – HALF THAT OF
AXIS POWERS, AND MOSTLY GEARED TO PEACETIME
GOODS & SERVICES.
• ARMED FORCES ONLY 480,000 (AXIS WAS 6.2 MILL.)
• FOOD PRODUCERS WHO TURNED MOST LAND INTO
PASTURES FOR LIVESTOCK
• BRITAIN AT YEAR ZERO WAR PREPAREDNESS.
• NAVY & 2000 SHIP MERCHANT FLEET KEPT BRITAIN
ALIVE. Vs. GERMAN Z-PLAN FOR MASSIVE INCREASE
IN NAVY WITH EMPHASIS ON SUBMARINES &
SURFACE RAIDERS TO STRANGLE BRITISH SHIPPING.

147. FOOD PRODUCTION FOR BRITAIN
• REMARKABLE FORESIGHT IN PLANNING FROM 1936.
• 70% OF FOOD IMPORTED = 20 MILL. TONS P.A.
• RATIONING STARTED 4 SEPT 1939.
• AGRICUTURAL PRODUCTIVITY NEEDED A BIG JUMP TO REPLACE
728,000 TONS LOST AT SEA.
• INITIATIVES: “DIG FOR VICTORY” = 1 MILLION TONS FOOD;
“WOMENS LAND ARMY” =80,000 WOMEN IN 1944; CANNING &
PRESERVING IN HOMES; MEDICAL OVERSIGHT OF PEOPLE’S
HEALTH; SEVERE PETROL RATIONING (ONLY 2000 RETAILERS); U.S.
OIL BUILT 2 PIPELINES TO SEND 4.7 MILLION BARRELS PER DAY TO
BRITAIN
• “IN 1946, MOST BRITONS KNEW THAT THEIR COUNTRY WAS
BROKE…”

148. “DIGGING FOR VICTORY” IN
DONCASTER, ENGLAND

149. GOVERNMENT SPONSORED
CHILDREN’S HEALTH IN BRITAIN

150. BRITISH SHIPPING LOSSES 1940-1944
4804 SHIPS,