Rahul Jacob: Recall what Keynes and Kennan had to say

In 1914, John Maynard Keynes wrote an almost triumphalist ode to globalization, just before that vision was dismantled by World War I and the subsequent Smoot-Hawley Tariff Act in the US. Re-reading Keynes, it is hard not to think of Amazon, which serves a much wider swathe of the global middle class than the elite he was referring to when he wrote that “the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, and reasonably expect their early delivery upon his doorstep.”

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Both men were profound globalists, whose thoughts were the very antithesis of the Trumpian vision of trade and geopolitics as a zero-sum game. The unilateral tariffs announced last week, the nonsensical formula for tariff rates—derided for plausibly having been thought up by ChatGPT—and the accompanying rhetoric of retribution from the White House would have been sacrilege to Kennan and Keynes.

Kennan may have called for “a long-term policy of firmness, patience and understanding designed to keep the Russians confronted with superior strength at every juncture” in the 1940s, but he also cautioned that it must be done in a “friendly and unprovocative manner.”

In 1964, after resigning as ambassador to Yugoslavia, he wrote a book critical of the US Congress’ virulent anti-Communist world-view. By repudiating Cold War policies three decades ago, Kennan was also reacting to US meddling in Latin America and Vietnam. Today, however, with the White House lecturing Europeans on the weaknesses of their democracy one moment while threatening Canada the next, it is the US that is becoming ‘self-contained,’ or isolated from the rest of the world.

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Among Keynes’ many innovations in economic policy, he convinced the Bank of England to turn away from managing its gold reserves “with an eye to fluctuations in international trade, ensuring that Great Britain didn’t run out of gold due to too many imports or a shortage of exports,” as Zachary Carter observes in The Price of Peace, his biography of Keynes.

The alternative proposed was monetarism, which underpins how governments and central banks raise or lower interest rates and manage money supply to this day. But, it was his internationalist instincts that prompted Keynes to denounce the unequal terms of the Treaty of Versailles after World War I. He was proven right when Germany was unable to pay. This prompted the Calvin Coolidge administration to ask JP Morgan to come up with a solution, which was to extend Germany a loan and arrange another for France to secure its withdrawal from the Ruhr mines it had seized in Germany.

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It is a testament to Keynes’ larger-than-life stature, even for a man who was 6 feet and 7 inches, that an early copy of the plan was given to him. Keynes conditionally accepted the plan as an “honourable document.” In passages that would apply to diplomatic efforts to contain the damage of US tariffs, Keynes wrote: “Though the language seems at times the language of a sane man who, finding himself in a madhouse, must accommodate himself to the inmates, it never loses its sanity.”

The genius of Carter’s biography of Keynes is that he traces the developed world’s turning away in the 1990s from Keynes’ vision of economic policy as an instrument of inequality and unemployment reduction to the rise of a neo-liberal agenda that led to excessive financialization in the US.

From the Clinton administration’s ill-considered deregulation of the banking industry in 1999 to the IMF and European central bank’s insistence that countries such as Spain and Greece reduce their fiscal deficits amid an economic crisis, there is plenty of blame to be apportioned. “The neoliberal faith in the power of financial markets bequeathed us the financial crisis of 2008, and the fallout from that disaster has fuelled dozens of hateful movements around the world,” writes Carter.

He points out that while Wall Street got a huge bailout, at least 4 million families lost their homes because the Obama administration failed to push through a bill to reduce mortgage payments.

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Given the backdrop of misinformation on social media and the wide adoption of nationalist industrial policies, even a reincarnated Keynes would not be able to save the world from our downward spiral today. The all-too-common reaction to the catastrophic US tariff regime that India may be a beneficiary overlooks how global trade and consumption will shrink and the fact that Vietnam is better integrated than India with global supply chains for mobile phones and branded sneakers.

In an interview with Karan Thapar on The Wire last week, Montek Singh Ahluwalia made an articulate case for using the Trump onslaught as an opportunity to return to our path of import duty reduction throughout the 1990s. Ahluwalia was so persuasive that trade liberalization and free trade agreements are good for their own sake that I imagined Keynes nodding his head in agreement.

The author is a Mint columnist and a former Financial Times foreign correspondent.