Keynes and the death of capitalism

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In a recent article for the New Statesman, the economics commentator Grace Blakeley makes an extraordinary claim. Writing about the origins of the IMF, she says:

Seventy-five years have passed since these international financial institutions were created in Bretton Woods, New Hampshire, in 1944. Back then, delegates sought to tame the power of international finance, the growth of which helped to cause the 1929 Wall Street Crash and the ensuing Great Depression. JM Keynes – who led the British delegation – arrived at Bretton Woods with the aim of “euthanising” a financial elite he viewed as parasitic on productive economic activity.

I thought that Bretton Woods was about free trade and economic cooperation, not "taming the power of international finance." But I can be wrong. So I checked it out.

According to the U.S. State Department, Bretton Woods was indeed born from the U.S.'s dreadful experience in the worldwide depression of the early 1930s. But it was not international finance that Bretton Woods aimed to tame, but beggar-my-neighbour government policy:

The lessons taken by U.S. policymakers from the interwar period informed the institutions created at the conference. Officials such as President Franklin D. Roosevelt and Secretary of State Cordell Hull were adherents of the Wilsonian belief that free trade not only promoted international prosperity, but also international peace. The experience of the 1930s certainly suggested as much. The policies adopted by governments to combat the Great Depression - high tariff barriers, competitive currency devaluations, discriminatory trading blocs - had contributed to creating an unstable international environment without improving the economic situation. This experience led international leaders to conclude that economic cooperation was the only way to achieve both peace and prosperity, at home and abroad.

Nor did Keynes arrive at Bretton Woods with any plan to "euthanize the rentier". Keynes' proposal was aimed at governments, not capitalists:

Harry Dexter White, Special Assistant to the U.S. Secretary of the Treasury, and John Maynard Keynes, an advisor to the British Treasury, independently drafted plans for organizations that would provide financial assistance to countries experiencing short-term deficits in their balance of payments. This assistance would help ensure that such countries would not adopt protectionist or predatory trade and monetary policies to improve their balance of payments position. Both plans envisioned a world of fixed exchange rates, believed to be more conducive to the expansion of world trade than floating exchange rates.

Keynes himself summarised his proposal thus:

“an International Clearing Union, based on international bank money, called (let us say) bancor, fixed (but not unalterably) in terms of gold and accepted as the equivalent of gold by the British Commonwealth and the United States and all members of the Union for the purpose of settling international balances.”

Further down his original draft proposal, he advises that "the fabric of international banking organisation, built up by long experience to satisfy practical needs, should be left as undisturbed as possible." Taming international finance, it seems, was not on his agenda. So where does Blakeley's claim that Keynes aimed to "euthanise the rentier" come from?

It comes from Keynes' General Theory. And it has nothing to do with the trade imbalances that Bretton Woods aimed to control. It is all about interest rates. Keynes, writing in 1936, thought that weird should be normal:

There is, however, a second, much more fundamental inference from our argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.

There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto.... I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital....

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

The fact that this was written in the 1930s is important. Keynes' observation that the euthanasia of the rentier "will need no revolution" is both an acknowledgement and a challenge to Marxism. If capitalism is doomed anyway because of its own success, revolution is unnecessary. Mind you, that doesn't mean that the death of capitalism can't be helped along:

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward...

Dear Grace, in misappropriating Keynes' soundbite, you have entirely missed the point. Keynes foresaw a time when capital will be so abundant that capitalists cannot live on the returns from it and must work for "reasonable terms of reward". Rentiers will quietly die out.

We are living in that time. The real rate of return on capital has been falling for thirty years and is now very low. Capital has been all too successful at rebuilding itself after the enormous destruction of the first half of the 20th century. Now, there is too much capital and not enough profitable investment projects. As Keynes predicted, capitalism is eating itself.

But the rentiers who are suffering are not the rich capitalists that Keynes envisaged. They are middle-income retirees whose savings earn them practically nothing. We have built entire pension systems on the expectation of returns that can no longer be delivered. And yet the imperative to save has never been stronger, as populations age and governments step back from welfare provision. This looks like a classic feedback loop to me. As capital becomes more abundant, the real rate of return falls, forcing people to save more to fund their retirements, thus making capital even more abundant and forcing down the rate of return still more. Something has to give.

Historically, when capital becomes too abundant, the rich and powerful have preferred to destroy it rather than share it. And this brings me back to Bretton Woods. The late nineteenth century gold standard period, known in America as the "gilded age" because of its unprecedented prosperity, ended with the greatest destruction of capital in recorded history. The Bretton Woods conference aimed not to "tame international finance," but to restore the prosperity of the gilded age. The statesmen of that time recognised that cooperation, not conflict, is the route to prosperity. Keynes did not go to the conference to "euthanise the rentier", but to create a system in which the wealth of nations would be shared more equitably. This is what we must address - before it is too late.

Related reading:

The desert of plenty
Lessons from the Long Depression
General Theory of Employment, Interest and Money - John Maynard Keynes (quoted passage is from Chapter 24 II)
IMF 1945-65: original documents
Creation of the Bretton Woods system - Federal Reserve History
Wipe out savers with cheap money - Martin Wolf

Image is of John Maynard Keynes addressing the Bretton Woods conference in 1944.