The Consequences to the Banks of the Collapse of Money Values (August 1931)

Abstract

A year ago it was the failure of agriculture, mining, manufactures, and transport to make normal profits, and the unemployment and waste of productive resources ensuing on this, which was the leading feature of the economic situation. Today, in many parts of the world, it is the serious embarrassment of the banks which is the cause of our gravest concern. The shattering German crisis of July 1931, which took the world more by surprise than it should, was in its essence a banking crisis, though precipitated, no doubt, by political events and political fears. That the top-heavy position which ultimately crumbled to the ground should have been built up at all was, in my judgement, a sin against the principles of sound banking. One watched its erection with amazement and terror. But the fact which was primarily responsible for bringing it down was a factor for which the individual bankers were not responsible and which very few people foresaw—namely, the enormous change in the value of gold money and consequently in the burden of indebtedness which debtors, in all countries adhering to the gold standard, had contracted to pay in terms of gold.

This article made its first appearance in print in Essays in Persuasion, It was originally written in August 1931 for the American popular monthly-magazine Vanity Fair, but in October Keynes revised it considerably—as he wrote to the managing editor, ‘partly to meet the new situation [the departure of England from the gold standard], partly to meet your criticisms and partly on second thoughts’. Vanity Fair published a slightly longer version of the article (the text here given) in January 1932.