The once prevailing consensus that the benefits of globalization outweigh its costs (by far) has broken down in recent years. There is widespread discontent and increasing polarization between cosmopolitan and nationalist views in many corners of the world, spurred by conflicts about trade, migration, multilateral governance and geopolitical ambitions. The reputation of economists as experts on globalization is impaired since their discipline appears to have largely lost “the big picture” out of sight. This paper argues that these developments have followed from an interaction of three types and trends of fragmentation: economic, political and scientific.

In the Treatise on Money, Keynes outlines a theory of cycles that includes the case of financially-induced asset price inflation in which banks provide credit to speculators who over-extend themselves. This can lead to bubbles which, after bursting, generate economic downturns. While Keynes has something to say in the Treatise about how central banks ought to respond to the possibility of economic fluctuations, he does not cite Walter Bagehot’s principle of lending freely to solvent banks in a crisis, despite being aware of Bagehot’s analysis in Lombard Street. This paper highlights the surprising nature of this omission on first inspection by comparing the treatment of financial crises in the Treatise with that in Lombard Street, and finding a significant degree of similarity. But it also offers a possible explanation for Keynes’s omission of the Bagehot principle by suggesting that Keynes advocated an alternative that made an appeal to this principle unnecessary. Rather than advocating Bagehot’s prudential policy of accumulating a banking reserve that could be deployed ex post once a crisis occurs, Keynes recommended the ex ante use of monetary policy to prevent crises from occurring in the first place. By maintaining Bank Rate at the natural rate of interest, investment and saving can be kept in balance, which not only leads to stable prices within the theoretical framework of the Treatise, it also makes the trade cycle and financial crises obsolete. A comparison of the policy responses to financial crises in Keynes’s Treatise and Bagehot’s Lombard Street thus raises the question of the respective roles played by prudential regulation and monetary policy in dealing with this phenomenon, a question of enduring relevance.

Present-day developments after (or, still through) Pandemics, are metaphorically confronted with the “Post-war” experience of one century ago in the 1920s, following World War One. The considerations center on the critical developments of Public Debt, inflated by the needs of exceptional Finance during the occurrence of major crises. How can the dramatic experiences, as suffered in some greater European Nations at that time, be better avoided in the coming, “Post-Covid” era? Although Pandemics and World War remain singular and incomparable events in the history, monetary expansion and Debt entanglement are a common implication; awareness of past experiences should help as guidance in the perilous passages of Policy facing Europe.

The global financial crisis, triggered by the 2008 subprime mortgage crisis in the US, indicates that financial factors are a significant cause for economic instability. This crisis represents a point of a departure for this study, which addresses the issues of financial instability, cycles and the fragility of the financial structure. We construct macrodynamic models of financial instability, which include debt burdens, wealth accumulation, states of “euphoria” and the instability of confidence.

As Keynes outlines in the General Theory, according to the classical theory of loanable funds, the equilibrium interest rate occurs at the intersection of the saving and investment curves. While the former is derived from the intertemporal choice of consumption, the latter represents the marginal product of capital. Some classical authors, such as Taussig, discuss negative interests in this framework. Since the market interest rate rarely became negative until recently, if the equilibrium interest rate had been negative, the government would have had to fill the saving-investment gap by running a public deficit. Negative interest rates would surely cure this problem. Cassel, however, mentions another possibility, that the saving curve has a downward rather than upward slope. It is problematic because there is a possibility that the saving and investment curves do not intersect at any point. If they do not intersect, lowering interest rates may increase rather than decrease public deficit. Thus, it is essential to identify the shapes of the two curves before taking any policy action, either to raise or to lower the interest rate.