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Documentary, Masters Of Money Part 1 John Maynard Keynes
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00:00This vast solar power plant being built in the remote Arizona desert is part of the biggest
00:13economic rescue effort in history. While the cost of action will be great, I can assure you that
00:20the cost of inaction will be far greater. With the economy still struggling, the American
00:26government is shelling out three quarters of a trillion dollars to try to haul the country
00:31out of trouble. And in Britain, billions are being spent to accelerate growth, even by
00:38a government determined to cut borrowing. Is this really the right road to take? After
00:44the crash in 2008, the world seemed to be running out of cash. But rather than cut back, governments
00:51spent huge amounts of money they didn't have. Why on earth would they do that? It all goes
00:57back to the extraordinary ideas of this man, the British economist John Maynard Keynes.
01:04Quite simply, he changed the world. I think it is true that he's one of the great figures
01:09of the 20th century and in many ways of the 21st century. Keynes thought capitalism was
01:15brilliant. But left to its own devices, it could also go seriously wrong. It was up to governments
01:20to step in to get the economy back on track. He was the archetypal man in Whitehall, Westminster
01:27or Cambridge who thought he knew best. Keynes has never been more relevant or controversial
01:33than he is today. Because for the first time since the 1930s, the problems he was grappling
01:40with then. Bank failures, international crises, the possibility of a long economic slump, we're
01:46facing too. In this series, I'll tell you about the lives and thoughts of three extraordinary
01:53men with radically different views. Karl Marx, Friedrich Hayek and tonight Keynes. They all
02:02saw that taming the growing power of money was the crucial challenge for the modern world.
02:08All three were intellectual giants whose ideas have been a hidden force shaping world events,
02:13changing the lives of every one of us. But I think they have something special to tell
02:17us right now. Because they, more than anyone, taught us the awesome power of money, the good
02:23that markets and capitalism could do, and the enormous trouble they could cause. I think
02:28they'd know exactly what we've been going through. I want to know, can they help us find a way out?
02:34The quiet hills of North West England. For me, a chance to experience economics in action.
03:04I'm getting to try out rally cars competing in the Tour of Cumbria.
03:23The sponsors, Pirelli, are getting a slice of the government's £2.4 billion fund to help regional
03:30growth and employment. They want to show me what the company's really all about.
03:42Pirelli's one of the world's biggest tyre makers. It's been manufacturing in Britain for almost a
03:47century. It wants to develop some of its top ranges and beef up research and development.
03:55Brilliant. Absolutely brilliant. But the sums hadn't been adding up.
04:00This factory is one of Carlyle's biggest employers. There are about 750 workers here, producing
04:1910,000 tyres a day. Not so long ago, people worried the company would shift production overseas
04:25to cut costs. A £2 million government grant has persuaded Pirelli to invest in Britain instead.
04:35When we have a major investment, the confidence in people to spend their wages is increased and the
04:42local economy benefits. And it's not only Pirelli employees. We have hundreds of suppliers and contractors
04:51who depend on this factory. And they benefit also when Pirelli increases its spend. And also,
04:57they recycle that money into the local economy.
05:00It might seem surprising. A handout to a private company when the government's so worried about
05:06them mounting national debt. Now more than a trillion pounds. But Keynes was quite clear. There are times
05:14when we need to step in to make capitalism work for us, even when that means spending money we don't have.
05:20What Keynes said was that it was possible for government to come in and make markets work better. So,
05:29uh, one way that it's often put is that Keynes save capitalism from the capitalists.
05:36When we find instances of economies being seriously knocked out of equilibrium, it's generally been
05:51as a result of government policy mistakes. Um, but Keynes didn't really make a convincing case that
05:57even when an economy was knocked out of equilibrium, that government action could do better than allowing
06:03the economy to essentially mend itself. So Keynes was either an economic saviour or the man who led us
06:14all astray. But there's no argument that he changed our world and the way we think about it. He was at the
06:19centre of the debate 80 years ago and he's back there again today. A great weight is lifted from us.
06:27This is the only known film of Keynes speaking. There's no danger of the exchange falling too far.
06:33There's no danger of a serious rise in the cost of living. It's a broadcast about economics, how to
06:39share out the world's resources. But for Keynes, this was no dry science. It was about changing the
06:48world for the better. I think if we're looking at Britons who made a real difference in the 20th
06:55century, the most obvious name would be Winston Churchill. John Maynard Keynes is really not far behind.
07:05Keynes spent years in this house in London, developing ideas that helped shape some of the
07:10the most important events of the past century, helping to save capitalism from the Great Depression,
07:16funding the war against the Nazis and building a new post-war economic order that helped pave the
07:23way for decades of growth and rising prosperity. What's really extraordinary about Keynes from a
07:29modern perspective was his access. Despite being so unconventional in his life and especially in his
07:35views, he had the ear of anyone who mattered. Presidents and Prime Ministers all listened to what he had to
07:42say that it was only after his death that everyone started taking his advice. I applied to university in 1965
07:52and the whole intellectual climate of the time, not just in terms of economics but politics,
07:57was driven by the idea that Keynes had solved the economic problem.
08:05By the late 1960s, Keynes' ideas were built into the fabric of pretty much every western economy,
08:11but he didn't seem to have an answer to the high inflation of the 1970s. After that,
08:17Keynesian fine-tuning was out and free market ideas gradually took over. But when the world got into
08:25serious bother in 2008, Keynes was back. It's ideas that mobilised the world, on right and left,
08:34good and bad. And Keynes was the author of, in my judgment, the best suite of ideas about how to think
08:40about capitalism that there's been. And if you think that counts, then he counts.
08:55So what are these great ideas that have dominated our economic landscape for so long?
09:00And where exactly did they come from?
09:06Keynes was born at the height of the British Empire in 1883, to middle-class parents who sent him to Eton
09:14and Cambridge. So far, so conventional. But at university, he fell in with a very unconventional crowd,
09:23the Bloomsbury set. As a young man, he spent a lot of time here at their country retreat, Charleston,
09:29in Sussex. It was a kind of commune for artists and writers and the one economist.
09:37They did see themselves as very different. To an extent, they were tinged by that rather
09:44indefinable concept, bohemian.
09:54They were very ahead of their time. They were pioneers about sexual behaviour. They were pioneers
10:00on the political front. They were pioneers in many aesthetic fields, in writing and in the arts.
10:09The Bloomsbury group allowed him to step outside of the box and to think the unthinkable. And that
10:15breadth of intellect that he had allowed him to leap off cliffs with the confidence that there was no bottom.
10:30Cane's immersed himself in the cultural world all his life, collecting paintings, fine books, even
10:42founding the Arts Theatre here in Cambridge. Perhaps it's no coincidence that a man with such wide-ranging
10:48interests should have the vision to develop a radically new approach to economics – Cane'sianism,
10:54shorthand today for government efforts to control the economy. Cane's was born, nearly 130 years ago,
11:02into a confident age. Science had been marching forward in medicine, in engineering, every year
11:09extending what was humanly possible. But there was one domain where science had barely begun – economics,
11:17the world of money and markets. If we could tame capitalism, we could really shape our destiny.
11:25Cane's fundamentally believed that. But he also understood, maybe better than some of his followers,
11:31just how difficult that was going to be.
11:40Greek fury at the austerity they feel has been imposed on them by their European neighbours.
11:45For Cane's, this might feel a bit familiar. He saw at first hand the disaster that can come from
11:53stronger countries dictating economic terms to the weak.
12:00That helped him form his first big idea. In an interconnected world, when you beggar your neighbour,
12:07you might well beggar yourself.
12:15It was an idea forged by the horrors of World War I. True to his Bloomsbury values,
12:22Cane's didn't want to fight in the war.
12:27But he was willing to use his economic brilliance to help finance it.
12:31Cane's job at the Treasury was to help channel loans from America to other countries in the Alliance.
12:40His time here brought home to him how integrated the global economy had become.
12:45Isolation just wasn't an option. The economic fate of entire populations might come to depend on events
12:52hundreds, even thousands of miles away.
12:54Once the war was over, Cane's could see how hatred of the defeated Germans might lead the victors
13:06to make a terrible mistake.
13:09At the end of the First World War there was a great deal of obviously public hostility towards Germany.
13:13I mean it had been a disastrous war, both obviously in terms of lives and casualties, but economically too.
13:20I think there was quite a strong feeling that Germany must be made to pay.
13:26At the Palace of Versailles, where the peace treaty was signed, British Prime Minister Lloyd George
13:31and his French and American allies relished their victory.
13:35Cane's was a member of the British delegation here, but against his advice,
13:40Germany was ordered to pay everyone's bills for the damage and suffering caused by the war.
13:45How could Germany afford to repay that debt? You need an economy that is running to produce money,
13:52to produce wealth, and then you can repay. You cannot repay without of nothing.
13:58Cane's was so outraged that he resigned from the treasury and retreated to his room in Charleston
14:10to write his first major book, The Economic Consequences of the Peace.
14:16Brilliantly written, it became a bestseller, though some said, with his sympathy for the Germans,
14:21he should be awarded an Iron Cross.
14:23He says, if we aim deliberately at the impoverishment of Central Europe,
14:29vengeance, I dare predict, will not limp.
14:33The key point for me is, he didn't just think it was immoral, the treaty, or unfair.
14:39He thought it was stupid. He thought a desperate Germany wasn't going to keep the peace in Europe,
14:45and it certainly wasn't going to contribute to prosperity.
14:48It wasn't going to buy goods from Britain and help Britain recover from the war.
14:51It's something he kept coming back to, one way or another, throughout his life.
14:56We're all in it together.
15:04The Versailles Treaty brought one of the great powers of Europe to its knees.
15:12As Keynes predicted, the German economy descended into chaos.
15:15Their debts were so impossibly large, they ended up printing the money to pay the bills,
15:23which quickly led to hyperinflation and a thoroughly worthless currency.
15:30Hyperinflation didn't just destroy the economy, it destroyed the fabric of German society, people's hopes too.
15:37There are stories about people taking out all of their savings to buy a single postage stamp for a suicide letter.
15:45When Keynes warned that the Versailles Treaty would bring a catastrophe here.
15:50Even his admirers might have thought he was exaggerating, but they didn't think that for long.
15:55Just 14 years after the Treaty of Versailles, Hitler came to power.
16:08World War II wasn't far away.
16:18As Keynes had predicted, the price of getting economic relations wrong was calamity.
16:23Keynes foresaw that the reparations were too onerous, would have to be adjusted,
16:28and that actually you were laying the seeds of the next European conflagration.
16:33He thought it was unbelievably short-sighted, and he was right.
16:40So what would Keynes make of Europe today?
16:43Well, once again, he might see strong countries dictating economic terms to the weak.
16:48But this time, it's strong countries like Germany itself insisting that crisis-ridden nations like Greece
16:54sign up to tough budget cuts in exchange for emergency loans.
17:01The newspapers show the depth of ill will that's built up as a result of the crisis.
17:05You've got the Germans talking about the Greeks as no-good scroungers.
17:10But in Greece, well, there's no more taboo any more about comparing German leaders to Nazis.
17:17Though Keynes might say they were harking back to the wrong war.
17:21The tough conditions being imposed on Greece might remind him, ironically,
17:26of a deal imposed on Germany at Versailles.
17:29The dominant thinking in Europe at the moment is exactly repeating the mistakes I believe,
17:35certainly as far as Greece is concerned, as was made at the end of the First World War.
17:39There comes a point, if you visit upon countries things they can never deliver,
17:42it will end in tears.
17:43If you look at what's happening in the Eurozone today,
17:46riots on the streets of Greece, general strikes in Spain, general strikes in Portugal,
17:51you can see, well, aren't we just failing to learn the lessons of history here?
17:59If Keynes could join me in Berlin today,
18:04he'd surely appreciate the complexity of the crisis in the Eurozone,
18:09and he'd understand why ordinary Germans feel it's time for Greece to pay its own way.
18:14But he also understood that imposing too much austerity could be self-defeating.
18:22I think he would have said, let's make Greeks strong so then they can repay their debt.
18:27As long as the debtor pays, the creditor is happy. But as soon as the debtor gets into
18:33difficulties, and if he's a very important debtor, the creditor has also problems, because he won't
18:39get his money back.
18:42Faced with the crisis affecting the people of Europe today, Keynes would undoubtedly have come up with
18:48some solutions. In fact, years after the Treaty of Versailles, he'd unveil a plan for countries to
18:56work better together. But first, there was a more basic question, how to steer the economy itself.
19:03To tame the economy, to make it work for us, Keynes realised you first had to understand how it worked.
19:15And the tool for doing that, economics, was still young in the 1920s, but it had grand ambitions.
19:22People hoped you'd be able to predict the movement of economies like you could predict the movement of
19:26the planets. Keynes was drawn to that idea as well. But he came to the conclusion, economies weren't like
19:33planets. They were more like people. You never really knew what they were going to do next. In fact,
19:41he noticed the times when economies looked most predictable were usually the times when things
19:47were about to go disastrously wrong. It certainly felt like that in 2008, when the global financial
19:58system imploded after one of the longest booms in history. Many claim now to have seen it coming,
20:06but at the time, many more behaved as if the good times would go on and on.
20:10No return to Tory boom and bust. Being too sure about the economic future was another mistake that Keynes had
20:20warned about 80 years ago. Because he'd made the same mistake himself.
20:26After resigning from the treasury after World War One, Keynes retreated to the sanctuary of his old
20:42college, King's in Cambridge. He was a lecturer and later a bursar, looking after the college's finances.
20:56He had a special interest in probability theory, a branch of mathematics that tries to predict the
21:08future from the evidence of the past.
21:15When he wasn't writing or studying, Keynes was often betting on the financial markets. He needed money
21:22and he thought speculation was a good way to guess it. But it was also a great way for him to test his belief
21:28that probability theory and statistics could help you predict the way markets were going to move.
21:33He had very mixed results.
21:51In his early years as an investor, Keynes sat in bed every morning, poring over reams of statistics about
21:57currencies, shares, bonds and commodities, when he was sure he'd worked out which way the market would move.
22:04In this economic knowledge that he had, this great thirst that he had for numbers and statistics,
22:13he believed, I think, that he could define, delineate the business cycle.
22:19And as a consequence of that, you would be able to pick when was the right time to be in the stock market,
22:25to own shares, and when was the right time to come out of the stock market into, say, bonds,
22:31government bonds in particular, or alternatively, bonds.
22:33And when was the right time to come out of the stock market into, say, bonds, government bonds in particular,
22:37or alternatively cash.
22:52But none of Keynes' elaborate calculations pointed out the disaster just around the corner.
23:00Wall Street before the crash in 1929 looked a lot like the tail end of our market boom.
23:06Investors could see no end to the good times.
23:09Armed with the very latest mathematical models, they thought they had everything covered.
23:15Then the bubble burst.
23:18World markets collapsed and Keynes lost money along with millions of others,
23:22paving the way for the Great Depression.
23:24His confidence in predicting the future was gone.
23:27He would have bitterly reproached himself for not foreseeing the Great Depression,
23:32but he came to the view that the future is not like that,
23:37that anybody who happens to predict it right
23:41is likely to be doing so on the basis of luck rather than judgment.
23:49Keynes' speculating days weren't quite over.
23:52Years later, he thought he might have to store hundreds of tonnes of wheat
24:01in King's College Chapel after a commodity trade went wrong.
24:06But he did change the way he invested and became a wealthy man.
24:10He'd learned lessons about the way economies work that we still struggle with today.
24:15That you can never get rid of uncertainty and that economies are made up of people, not numbers.
24:24More than anyone, Keynes wanted economics to be respected as a modern science.
24:29But he knew it was never going to be a science you could reduce to a set of equations,
24:34iron predictions, because economists were always going to have one extra thing to deal with,
24:40human nature.
24:42If you don't know about the future and you're trying to get a fix on what's
24:46taking place at any moment in time, you would defer to the crowd.
24:52The crowd is moving in a certain direction and they must be right.
24:54You know, the crowd's buying. What are they buying? I must buy too.
24:57The crowd's selling. I must sell too. It's very animal. It's very heard.
25:03This idea of herd psychology helped Keynes make sense of the economic bubble that blew up
25:10in the years before the great crash of 1929.
25:15It can also do a pretty good job explaining our own great financial crash in 2008.
25:24In normal times, any economic textbook, now or in Keynes' time, would say if the price
25:29of something goes up, people buy less of it. If the price goes down, they buy more.
25:34That's how markets work. Except, Keynes realised, when you have bubbles.
25:40Then a different side of human nature takes over. It's the side that says,
25:45house prices are going up, shares are going up. I should buy more because the price is going to go
25:49up again. Which, of course, it does. It becomes a self-fulfilling spiral.
25:54Prices go up and up and up and up. Eventually, the bubble will burst. It always does.
26:03In the years before 2008, did we forget what Keynes had taught us about herd psychology,
26:10bubbles and the uncertainty of economic life?
26:13Did the bankers, investors, politicians and the rest of us simply get too confident
26:20in thinking the good times would go on forever?
26:23I think in as much as people actually sat down and thought about what were the risks,
26:28what are the uncertainties, then quite clearly a large number of people were manifestly found wanting.
26:34And of course, if you don't know what you're doing, it's not surprising that you
26:38end up being smashed to bits and that's precisely what happened.
26:43It's not surprising that you don't know what you're doing.
26:51Keynes' big ideas that countries shouldn't beggar their neighbours,
26:55that markets were unpredictable, all came out of his own experience.
27:00And now the Great Depression produced his most important idea yet
27:04and added real urgency to his need to tame the economy.
27:08What he realised was economies might sink and then not automatically float back up.
27:16Looking around the Western economies today, that does sound a bit familiar.
27:25In the early 30s, the outside world was deep in gloom,
27:29with dole queues lengthening and factories closing everywhere. But Keynes' life was blissful.
27:37By now, he was famous and he'd shocked even his avant-garde Bloomsbury friends by marrying a Russian
27:43ballerina. Up till then, he'd been gay.
27:46Art, books, love affairs – for Keynes, this is what life was all about. But he understood,
27:59probably more keenly than his Bloomsbury friends with their inherited wealth, that money kept the whole
28:05thing afloat. You couldn't have a civilised society without a well-functioning economy. When he was back
28:12in the real world on Monday morning, he could see the British economy wasn't working at all.
28:21Britain had been in a slump for years. Classical economists said that if workers
28:25would just agree to wage cuts, businessmen would invest again, create jobs, and the economy would
28:31revive. But Keynes disagreed. He thought the way to recovery was being blocked by pessimism,
28:39or low animal spirits. The big insight of Keynes behind all of this was that a market economy
28:47is not self-stabilising. And when you get very big changes in animal spirits, in sentiment,
28:53where people who are producing to sell in the future suddenly worry that actually maybe there
28:57won't be the demand in the future, so they stop producing. To get out of that low output trap can be
29:04very difficult. Keynes' realisation that an economy could stay sunk indefinitely was a radical break
29:15with conventional thinking. The classical approach said the economy would get better,
29:22we just had to give it time. But looking around seemed obvious to Keynes that it wasn't getting any
29:28better, and it seemed blindingly obvious why it wasn't. Every time someone lost their jobs and
29:33joined the doll queue, well, they had less money to spend, so that would mean fewer goods were bought,
29:39probably mean more job losses. You could get caught in a downward spiral with no obvious way out.
29:45Now, it seems equally obvious to us today, but back then it was all very new.
29:51Keynes thought the low animal spirits in the business world were now infecting everyone.
30:03In a radio broadcast in 1931, he made a dramatic call for action.
30:11The slump in trade and employment are as bad as the worst which have ever occurred.
30:17Activity and enterprise, both individually and nationally, must be the cure.
30:26Today, Keynes' followers have made similar calls.
30:30Years after the start of the recession, the economy is still struggling to get back to where it was.
30:36You don't have to be Keynes to see animal spirits are low. Whether his ideas can revive them is another
30:43question. Keynes' insight that countries could just get stuck was probably his most important
30:49contribution to economic thinking. But he didn't just want to understand economies, he wanted to
30:55make them work better. He had plenty of advice for getting out of a slump, but the most controversial
31:01was that governments should spend money they haven't got. To my mind, the biggest argument in
31:07politics today is over whether countries have done too much of that since the crisis hit or not enough.
31:21Keynes might have died almost seven decades ago, but out here in the Arizona desert,
31:27his big idea for getting the economy moving again lives on.
31:36At Gila Bend, they're building the biggest solar power plant of its kind in the world.
31:41The site covers over three and a half square miles. Nearly a million mirrors will capture enough energy
31:55to provide 70,000 American homes with clean power. But for the people in this remote region,
32:03and for John Maynard Keynes, probably the most important thing this plant will produce is employment.
32:10Between my wife and I, we probably spent two years out of work. Thank God, not at the same time, but
32:18but we took some very significant hits.
32:26Company that sources our manpower tells me they receive 300 resumes per day. There's
32:33there's a lot of people looking for work, and the people who have jobs out here are very,
32:37feel very lucky to have their jobs. In effect, this plant is part of a vast Keynesian experiment.
32:45In the wake of the crash, the US government stumped up three quarters of a trillion dollars for
32:50projects like this one to create jobs and growth.
32:53In normal times, say the people who run this site, they would have raised the billion and a half dollars
33:03to get things going from commercial banks. But these aren't normal times.
33:08Because of that downturn, we had to look for alternative sources of financing. And of course,
33:19in this context, the federal loan guarantee program here in the US has helped it out a lot.
33:25In fact, without that kind of public programs, this plant could have never been a reality.
33:34Now we're used to governments using their cash to try to bring the economy to life
33:38in hostile environments where private money is drying up. But back in Keynes' day,
33:44it was a much more controversial idea.
33:53In the 1930s, Keynes spent weekdays at his home here in London's Bloomsbury district.
33:59He wrote countless articles and pamphlets explaining how something could and should be done
34:05to tackle this Great Depression. In normal times, Keynes thought monetary policy was the best way to help
34:12the economy. You cut interest rates to encourage people to borrow and spend more and companies to
34:18invest. But when animal spirits were really low, that might not be enough. Companies might not see
34:25the point of making new investments. People might not want to borrow, no matter how cheap it was.
34:30That's when Keynes thought government did need to make up the gap with more public spending.
34:36Keynes suggested the government should hire people to demolish South London and then rebuild it.
34:44He wasn't serious, but he was making a serious point. If the government borrowed to create jobs,
34:51people would spend more, confidence would rise and the economy would recover. If you pick the right
34:56moment, he insisted the extra spending would pay for itself by producing higher tax revenues.
35:02Well, of course, he did have enormous trouble trying to persuade the Treasury, the so-called
35:07Treasury view, that you should borrow at the bottom of a business cycle.
35:12But in economic terms, what you need is more demand in the economy, and you can do that in the ways
35:17that Keynes suggested. Naive Keynesian prescriptions of simply responding to depressions and recessions by
35:23raising the budget deficits as if this had no adverse effect on other economic variables,
35:31I really think are very dangerous policy prescriptions.
35:35In the 30s, Keynes found that most British politicians had a similar view.
35:39High borrowing was dangerous. He thought he might have a more receptive audience in America.
35:46After all, he was now a celebrity on both sides of the Atlantic,
35:49and the economic situation in America was desperate.
35:56The gross national product was down to almost 70 percent. You had unemployment nationally at 25 percent.
36:02In places like Chicago and Detroit, unemployment was up to 50 percent, over half the population unemployed.
36:10President Hoover's solution to the Great Depression had been spending cuts and tax rises.
36:17He'd made an argument we've heard others make more recently.
36:20Balancing the country's books would create confidence and encourage investment.
36:24It didn't happen. Never has happened. When you cut back government spending,
36:31in a situation such as a recession or depression, demand goes down,
36:38unemployment goes up, and it's a vicious circle.
36:41Confidence isn't restored when unemployment goes up, and when business goes down, confidence is eroded.
36:52Hoover's successor, Franklin Delano Roosevelt, had a different approach.
36:56Again, echoing arguments made today, he thought the government should spend its way out of trouble.
37:06This nation is asking for action, and action now.
37:20When Keynes arrived in America in 1934,
37:23there's no evidence that he persuaded the US government to adopt Keynesianism.
37:29They were doing it anyway.
37:32Keynes had his one and only meeting with President Roosevelt.
37:36By all accounts, it didn't go very well.
37:38Keynes thought the President was no economist.
37:40The President thought Keynes was a bit too clever for his own good.
37:44But they did agree on the most important thing.
37:47This was no time for government to sit on its hands.
37:50It was time for an historic experiment.
37:58The New Deal, a vast programme of government-funded projects to put armies of jobless to work.
38:06Ever since, it's been the celebrated example of a Keynesian effort to boost flagging economies.
38:12And there's no more iconic project of that era than this one.
38:22Hoover Dam.
38:26Built across the Colorado River, bordering Nevada and Arizona,
38:30it was the biggest construction project in the world.
38:38I would call it a Keynesian project, absolutely.
38:41The government stepped in with money, built a deficit.
38:46And out of that came Hoover Dam, which gave thousands, tens of thousands of people,
38:51a new life, money to spend.
38:52Armies of workers from across America tunnelled for five years through mile upon mile of mountain rock
39:07to build what was in effect a vast power generator, providing electricity for huge swathes of the country.
39:14It primed the economy. 165 million dollar investment, which produced billions in growth, economic growth.
39:33Just eight miles away is Boulder City, built to house the workers building the dam.
39:39All these houses along these avenues are what we now call dingbat houses.
39:50They were the homes built for the workers.
39:53They were put up to last through the construction of the dam, very quickly built.
39:58But because people stayed, which they didn't anticipate people would do, families still live in them.
40:04Roger Shoaf runs the town's hotel.
40:07He thinks Boulder City shows how in a depression, extra government spending can trigger private
40:14spending and investment too, adding to the economic benefits.
40:18It's what Keynes called the multiplier.
40:23By the end of the second year, they lived in a town, a full town, fully operating town with retail
40:29stores and restaurants and medical facilities and recreational facilities.
40:35It happened in less than two years.
40:39Critics of Keynesian spending plans often say the benefits of fleeting and the costs permanent.
40:45But Boulder City took root and thrived.
40:51Those who still live here say if it hadn't been for the New Deal, this would still be desert.
40:57Hoover Dam might have helped the local area, but it's actually a myth that the New Deal ended the Great Depression.
41:12It took a world war and all the extra government spending that went with that,
41:17finally to bring the economy out of the doldrums.
41:25You might wonder whether a world war was really the best test of Keynes' arguments.
41:29But ever since then, so-called Keynesian policies have been what governments do when faced with emergencies.
41:36And the crisis of 2008 was the biggest emergency anyone had seen for a long time.
41:43When the global financial system crashed, the world faced the real possibility of another Great Depression.
41:50Governments have been preaching the free market for years.
41:53But faced with this economic disaster, they reached again for the old Keynesian levers.
42:00It was a classic Keynesian response.
42:02When individuals stop spending money and when businesses stop spending money,
42:06if the government also stops spending money at the same time, then what happens?
42:10The economy basically crashes.
42:13The aim was to boost confidence, or animal spirits, by making it easier to borrow, invest and spend.
42:20Interest rates were slashed to just half of 1%, the lowest on record.
42:26We're all now in uncharted territory.
42:29Then, when interest rates couldn't go much lower,
42:31the Bank of England started pumping billions of pounds directly into the economy.
42:35It's literally creating £75 billion in the next few months to get money moving around the economy again.
42:43Even VAT was temporarily cut.
42:46It will make goods and services cheaper, and by encouraging spending, it will help stimulate growth.
42:52In 2009, with the global economy still tottering, leaders gathered in London to endorse a Keynesian
42:59rescue plan for the entire world.
43:01This is the day that the world came together to fight back against the global recession.
43:07I find it very hard to explain the collapsing world trade of over 15% in six months,
43:14between the end of 08 and beginning of spring 09, in terms of anything other than an extraordinary
43:19collapse of animal spirits or confidence.
43:23Now, some of that was turned round in 2009, but by no means all.
43:26Even that great rescue plan of 2009 wasn't quite what it seemed.
43:36For all Gordon Brown's talk, Britain's own stimulus plan was actually one of the smallest,
43:42because our government was already borrowing more than any other advanced economy.
43:46So even a Keynesian Prime Minister like Gordon Brown didn't think we could borrow a lot more.
43:52His successor thinks we should borrow much less.
43:56We now have a Prime Minister who, on one fundamental point, appears to disagree with Keynes.
44:02Some of the normal things that governments can do to deal with a normal recession,
44:07like borrowing to cut taxes or increasing spending, these things won't work because they lead to more
44:14debt, which would make the crisis worse. The only way out of a debt crisis is to deal with your debts.
44:21I suspect that Keynes probably wouldn't have used exactly the Prime Minister's formulation.
44:26I think that Keynes would have accepted at some point that you have to head back towards a more
44:31balanced budget, particularly if you don't want to stack debts onto future generations.
44:36To me, the remarkable thing is that countries like the UK, that have a choice,
44:41countries are voluntarily putting themselves through austerity and almost certainly we know what will happen.
44:52The economy will get weaker, unemployment will go up and there will be an enormous amount of unnecessary suffering.
45:03This argument will run and run on both sides of the Atlantic. In Arizona, the massive spending
45:12programme that built this solar power plant and let thousands clock on for new jobs hasn't been a
45:18miracle cure for the US economy. Maybe the medicine didn't work because the dose was too small.
45:24Or maybe the mountain of debt weighing on most Western economies means the Keynesian route to recovery
45:32is simply shut off. We are in a stratosphere today that we just have not seen before and maybe it's fine,
45:40but no other countries very rarely have seen these kind of debt levels, public, private and other measures. There are risks.
45:50By the 1940s, Keynes was riding high. His theatre here in Cambridge was thriving,
45:56he was back in the Treasury helping finance the Second World War and his books were being hailed as masterpieces.
46:04But he had one last big idea to pursue.
46:07The profound implications for the world then and now.
46:14Keynes' ideas for fixing broken economies had now been tested. But towards the end of World War II,
46:21he got a chance to leave his mark on the entire global economy. In a more integrated world,
46:27he was more convinced than ever that countries needed institutions to force them together,
46:32make them cooperate. The catastrophe after World War I could never happen again.
46:44The single most important trip to America that Keynes ever took was in 1944,
46:49to the exclusive resort of Bretton Woods in New Hampshire.
46:52He was joining delegates from over 40 different countries, all charged with laying the foundations
46:59of a new post-war global economy. They wanted to rebuild the system, you know,
47:06not just from the war, but from the Great Depression. The financial system had just been destroyed.
47:11The economic chaos of the 20s and 30s was largely responsible for the war, Keynes believed.
47:21Countries had all focused on charting their own path without very much thought for what was going on around them.
47:29The world had paid a terrible price for that failure to cooperate.
47:33There was a real determination among officials, both in London and in Washington, that we couldn't do this again,
47:43that we had to fix the world's economy, that we couldn't go back to the kind of economic crisis we'd had before,
47:51because we couldn't afford another world war.
47:58As representatives from across the world gathered here at Mount Washington Hotel,
48:02elsewhere there was still ferocious fighting. But once the war was over,
48:07Keynes knew for the world economy to prosper, countries would need to work together much more closely.
48:15Only two delegations at the conference really counted, Keynes' British team and the Americans.
48:23Both agreed that there should be controls to prevent currencies fluctuating too wildly against each other.
48:29They agreed too that institutions that later became the World Bank and International Monetary Fund,
48:35should be there to foster trade and growth in poorer economies.
48:40Well, the big gain from it was the recognition that countries need to work together to resolve
48:45their macroeconomic problems. It's just not enough to pretend that you can do it as an island.
48:50You may be an island geographically, but you're not economically.
48:54But on one crucial issue, Keynes failed. The Americans were adamant that rich exporting
49:03countries like them shouldn't have to spend more and export less to balance world trade.
49:09It was weak countries with big trade deficits that had to shape up.
49:14If everyone at Bretton Woods had accepted Keynes' logic that it takes all sides to keep the global
49:20economy in balance, the world today might be in a lot better shape.
49:29This old East German television tower is a symbol of reunified Germany.
49:35But these days, feelings of European unity are in short supply.
49:42Ministers here in Berlin want struggling Eurozone countries to impose
49:46tough measures to get their economies into shape. The stronger countries have been willing to help
49:53by offering massive loans, but I don't think Keynes would have thought that was enough.
50:00Keynes thought for the global economy to work, it had to be a two-way street.
50:05So the weak countries that had run up a lot of debt with the rest of the world,
50:09they did have to become more competitive, learn to pay their way.
50:12But the rich exporters, well, they had to do their bit as well.
50:17Spending more on other countries' goods and exporting less, becoming a bit less competitive.
50:23Now that's a bit of Keynesian advice that doesn't go down well here in Germany at all.
50:28If you say Germany should export less or become less competitive, the popular Uber, that's mad.
50:35Why getting us weak when others are already weak? And certainly that's the wrong conclusion.
50:42There are signs of movement on Germany's side of the street.
50:52Domestic car sales have been going up.
50:57But exports are still a central plank of the country's economic policies.
51:04And car exports are up by almost a third in the past two years.
51:08German consumers have been spending more lately.
51:13But not enough to provide much of a selling opportunity for struggling countries like Greece.
51:21That's a very popular approach to tell German private houses, please spend more.
51:26Don't be so greedy with your money.
51:28But I think that's wrong because people look at their income and they say, I can't afford simply.
51:35And that's true. I mean, we have had very weak wage increases during the past years.
51:39And that's the point where you have to have higher wages.
51:43And these higher wages will certainly spend.
51:45And then German consumption will certainly be much stronger than it was in the past.
51:49And that will help us.
51:55Memories of hyperinflation are still raw in Germany.
51:59Few want to put their hard-won economic stability at risk for their weaker European neighbours.
52:05The divisions between countries at a global level are even clearer.
52:09Leaders pay lip service to Keynes' dream of a truly coordinated global economy where strong work with the weak for the benefit of all.
52:18But there's little sign of them actually doing it.
52:22I think Keynes would look at our world, the troubles in the Eurozone, the banking crisis.
52:28Say it was a pretty scary place without many of the checks and balances that he argued for at Bretton Woods.
52:34But he'd also say, he did say, that a really global economy was tremendously exciting, with huge potential to improve all of our lives.
52:45If governments could only work out how to put into practice that basic insight that he kept coming back to, we really are all in it together.
52:54Sure. It would be great to have better multinational institutions.
52:57And Keynes was a pioneer in that. He was a big believer.
53:01And I think in order to fix the international financial system, that would be very helpful.
53:05And maybe somebody with the sort of magnetism and gravitas and stature of Keynes could somehow catalyse that.
53:14But he is a rare person indeed.
53:19Keynes left an extraordinary legacy.
53:22He didn't just transform economics, he changed the lives of billions of people around the globe.
53:28There aren't many people born in the 1880s, whose name you hear as often as Keynes in current debates.
53:36His ideas that countries shouldn't beggar their neighbours, that economies were deeply unpredictable, could get stuck in slumps.
53:43They've changed the way we think about the world.
53:46But what can Keynes actually do for us right now?
53:49Back in Cumbria, it's clear what Keynes has done for them.
53:56Government intervention will help keep Pirelli's tyre factory open and provide a lot of employment.
54:03In the political mainstream, there aren't many who challenge Keynes' basic message,
54:08that you can't leave economies to drive themselves.
54:10Keynes was a very dominant force in the 20th century,
54:17and my guess is he will remain a dominant force in the 21st century,
54:20which is why I think he will go down as one of the greatest economists the world has produced.
54:26Eighty years ago, building this dam eased the Great Depression.
54:30With the government borrowing more cheaply than ever before,
54:33you might think the case for New Deal-type investments was equally strong today.
54:37But given the sheer volume of public debt,
54:40no-one can promise that piling on more borrowing will be a miracle cure.
54:45What is thought of as a typical Keynesian solution to get more debt, borrow money,
54:51spend, spend, spend and cut taxes, that needs to be used more judiciously here,
54:56because at the end of the day, you've got to get rid of this debt.
55:00This is a very long haul.
55:02I don't think anything just boosts your way and zooms your way out of this.
55:07There just is no magic bullet.
55:11And what of Keynes' final big idea, that countries are all in it together?
55:16Since Bretton Woods, the world has grudgingly accepted that we have to cooperate to prosper,
55:21but we're struggling to make it work in practice.
55:25He'd be worried. He'd be very worried.
55:28He'd have been very concerned about the growth of inequality worldwide.
55:33He'd be very concerned that there was a return to Begum-my-neighbour policies.
55:37I have no doubt that he would be warning of regional war and all its dangers.
55:44He'd be very frightened that the circumstances that led to war in 1418 and 3945 were on a slow burn basis unfolding in front of us again.
55:56Maybe the biggest thing Keynes could do for us now would be to remind us of the traits that guided him all of his life – imagination and optimism.
56:08He came along and was willing to examine these profound problems in ways that no one had done before.
56:18His great legacy is that fundamental belief in humanity, that fundamental belief in the ability of government
56:23and of society to dedicate itself to helping those that are less fortunate and need our help.
56:30In 1946, Keynes suffered a fatal heart attack in his beloved Sussex Downs.
56:49Just 62, he left a legacy that changed the world.
56:54But he also left an enigma.
56:55He thought we should try to tame the power of money to make it work for us.
57:01But he also taught us that economies were fundamentally unpredictable.
57:07It's a contradiction we're still grappling with today.
57:15More than anyone, Keynes paved the way for activist government.
57:20He said you could and should make the world economy work better.
57:24And the generation that rebuilt the global economy after the war really were children of Keynes.
57:32But when you read him today, there's another equally powerful message that comes through
57:36about the great unpredictability, uncertainty of economic life.
57:41You should never think you've got it covered, that you've abolished boom and bust.
57:45That's the great paradox.
57:47The man who did most to make economists arrogant, and their capacity to bend the world to their will,
57:54also gave them, or should have given them, the best reasons for self-doubt.
58:04Next time on The Power of Money, Keynes' great adversary Friedrich Hayek,
58:08who looked at the same facts and drew exactly the opposite view.
58:12The market needed to be set free, and government should back off.
58:17The Open University has produced six one-minute animations to explain
58:21some of the key economic ideas that affect all of us.
58:24So if you want to learn how to spot an invisible hand, or other secrets of economics,
58:28go to bbc.co.uk slash mastersofmoney and follow the link to The Open University.
58:39Can chemicals make us irresistible to the opposite sex?
58:43James May reveals all you need to know about chemistry next on BBC HD.
58:58The Open University
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