John Maynard Keynes' golden rule breached by Winston Churchill

It had been one worst ever years for the world economy. As boom turned to bust, shipping rusted in the ports. A third of the world's manufacturing capacity stood idle. Exports of cotton from the mills of Lancashire had fallen to the lowest level since the American civil war; output of pig iron was down 70%.

This was the world of 1922 when John Maynard Keynes as guest editor launched a series of Manchester Guardian special editions charting a way out of the post-war Depression. In many ways it was a different world 87 years ago: Russia was in turmoil after the revolution five years before, Germany was humbled by the treaty of Versailles and about to descend into hyperinflation; there were 10 times as many advertisements for manufacturing companies in the Guardian pamphlets than there were for banks. Lancashire still produced cotton.

Yet in other ways little has changed. The world was in the middle of a profound economic crisis and there were concerns about deflation, soaring budget deficits and turbulent foreign exchange markets as European leaders prepared for a conference in Genoa. "There is only one road to recovery," Lloyd George said, "and that is by honest and open co-operation between all the nations of Europe." Note the word "Europe". Despite the growing economic power of the United States, it was assumed that the old world, not the new, had to come up with the answers.

Keynes was yet to achieve the fame that came to him in the 1930s and had a rather more conventional view of what should be done. He favoured a return to the gold standard, abandoned during the economic chaos caused by the first world war, as a means of stabilising exchange rates and preventing policy makers from playing fast and loose with the public finances.

Stabilisation would lead not just to the revival of trade and production but also of international credit and the movement of capital. "One of the most vital parts of pre-war organisation would be restored. And one of the most subtle temptations to improvident national finance would be removed; for if a national currency had once been stabilised on a gold basis, it would be far harder (because so much more openly disgraceful) for a finance minister so to act as to destroy this gold basis."

Yet Keynes was strongly opposed to the idea that governments should raise their exchange rates to their old gold standard parities - a policy that he warned would only deepen the slump and lead to deflation. Three years later this was precisely the policy introduced - in the teeth of opposition from Keynes - by Winston Churchill.

In a later pamphlet, Keynes underlined the problems facing economists. Even if they had a secret remedy, they had to persuade the politicians. And "the politicians, who have ears but no eyes, will not attend to the persuasion until it reverberates back to them as an echo from the great public".