Idea Transcript
KEYNES ON INFLATION Thomas
Not
the
damage
least
done
of
inflation’s
to the reputations
economists.
A case in point
(1883-1946).
Once
pathbreaking
analysis
ployment now
folklore
cerned
Depression
with
for
has
preoccupation
ignore
it altogether,
expansionary
from
to
of their
inflationary
his
in
his
1946
“Keynesian”) slogans
trade-off
between the
thorities
can
activity
with
with
incomes
textbooks,
popularly
Small
are
the
The
warned
described purpose
the
from
caricatured
foregoing
being
that
of, this
repeatedly
of
the
mone-
widely
however, are
Keynes evils,
as
of the
per-
inflation
of Keynes.1
article,
its
stylized
manner
he has been
perceptions
In the
in. the
and that our present
an inflationist,
at
be contained
views
as the legacy
exdefi-
controls.
it to show
wrong: deplored and
that
enough
far
inflation,
far
advocating
to prevent with
1930s),
(1)
that
inflation,
(2)
hi’s advocacy
of
management
policy
(including
once
and
elements
even
inflation.
demonstrates
demand
of the
from
that
motivated
monetarist
em-
aggregate
concerned
occasions
and
in his analysis
expansionary
article
aggregate
two
inflation,
he maintained
be curbed
this always
inflationary
that
rates
must
to
stability,
concepts
finally,
concern
at least
(3)
in the that
on
Great
there
in his analysis
monetarist
anti-
are
to qualify
as far as inflation
is concerned.
These
points
graphs, first
in Britain
can
monetarists”
wonder
with
budget
this
are documented
which
inflation.
economic
On the policy
and,
inflation
au-
by manipulating
and wage-price
as an inflationist
is often
real
identified
growth;
that
as well the
was
theory
enduring
of price
at any cost,
precisely,
to prevent
nonmonetarist,
antipathy
goal
him as at least a partial
association
that
mounting
of the anti-inflationary
tarists. ceived
idea
policies
versus
and
simply
spending,
his views
“Keynes opposite
rates
level
money
the
notion
and,
Depression
inflationist
an
they command.
is now
government
least,
that
desired
inflationary
found
label
and “money
and unemployment
interest
instruments
such
of a stable
discredited
peg
his name
cessive cits,
inflation
at any
the policy
to
also
Since the
policies
extreme
monetarists’ policy
policy
More that
an
unemployment
Keynes
unemployment
at any cost”
concept
equally
demand
to
he favored
at least
the their
being
full employment
subse-
his
management
from
of inflation; at high
led him
far
at least five monetarist
uncon-
consequences. (or
linked
It has
discredited
as with
front
been
matter.” the
that
as a result,
name
as “full employment
doesn’t with
has
start,
he is
inflation.
largely
eliminate
regardless death
1930s, on
unemployment
measures
shared
ployed
he was
and that,
he
of mass
unem-
demand
that
endorsed
views
the
with
Keynes
restrictive it;
for his brilliant of the
his
it that
inflation
quent
causes
the
prominent
Maynard
regarded
of the
low marks
is
of certain
is John
highly
in the Great
given
Popular
consequences
M. Humphrey
As
pertinent
presented
in the
of the Peace
(1919),
on Monetary
volume
A
Indian
policy
Reform
in early
of his famous
1937,
one
year
after
Interest
and Money
(1936).
Theory,
which
deals
mainly
with
will not
be examined
here,
these
concerned
with
the
sistency
of Keynes’
and
a
The
publication
for the General
unemployment works
above
anti-inflation
(6) in
and
are
of inflation.
listed
(4)
the two-
of Employment
Except
problem
in the order
(5)
the
Theory
to the
1920,
published
General
examined
given
(1923),
The
and
Consequences
advice
articles
he
chiefly
Currency
(1930),
newspaper
on
when
in February
Treatise on Money
of four
Times
(3)
were
Economic
of the Exchequer
A Tract series
The
para-
views
are contained
(1)
(2)
own
as they
his views
works:
(1913),
Chancellor
Keynes’ now
them,
following
Finance
in the following
summarize
They are the con-
to show
attitudes
largely
over
time.
recommended Early
1 For a recent expression of this view see Buchanan and Wagner [l] who assert that “Lord Keynes himself” must “bear substantial responsibility” for our “apparently permanent and perhaps increasing inflation” [1; p. 41. “Without Keynes,” they write, “inflation would not be the clear and present danger to the free society that it has surely now become. The legacy or heritage of Lord Keynes is the . ..intellectual legitimacy provided to ... deficit spending, inflation, and the growth of government” [1; p. 24].
Writings
Keynes’ even
strong
his earliest
his Indian
Currency
emphatically ating
rejects
currency
tending are “only
aversion
that
to inflation
in in he
the
argument
is advantageous any
advantages
temporary”
FEDERAL RESERVE BANK OF RICHMOND
is evident
It appears, for example, and Finance (1913). There
work.
and that
that
“a
depreci-
. . . to trade,” derived they
from “occur
coninflation
largely
at 3
the
expense
of other
and therefore [ 5 ; p. 2].
He takes
Economic
members
do “not
profit an even
Consequences
demning
inflation
of the tougher
and
as a whole”
p. 150].
attitude
of the Peace
in
community”
the country
the
harshest
in his
(1919),
con-
possible
terms.
He says :
a Press
of vilification business Keynes
He agrees
with
Lenin
of destroying
that
the
inflation
basis
his view supply
of goods,
vation
of law
contains
in itself,
nomic
decay,
rapid
proceeds
inflation
to specify
works
to undermine
the
to weaken
foundations
market
system.
results
in a capricious
rangement distributive turns
First,
business
“the process
and a lottery.” tion “strikes the equity p. 149]. ments
the social
and
fabric
capitalist
inflation,
totally
system
that
“not
and
waste
he says, rear-
distribution
inflation
infla-
but at confidence
violates
in
of wealth”
long-term
[6;
arrange-
upsets
“all permanent
relations
which
form
the
[6;
p. 149].
between
discontent
and
whose
windfall
profits
are
wrongly
than
the
consequence
cause
This
rather
discontent
“being
many
seek to direct
indignation of their
causing nessmen
seek
known
lose
which
as ‘profiteers’ obvious [6;
actually
place in society” and become intimidation” by “governments 4
to be
of inflation.
the more
to shift
consequently
perceived
the
the
responsible onto
“confidence
In for busi-
in their
“the easy victims of of their own making, ECONOMIC
which inflationary to real
that
currency,
the
“the
regulation
the
in
and a reduced out-
preserby the
of prices,
seeds
of final
up the source
eco-
of ultimate
and
inefficiency
of inflation, inflation
the
exchange
real
relative
but leads
of barter”
the foregoing
he concludes
of commodities value,” [6;
and
finally pp.
harmful
149-50].
consequences
that governments
to get out of control
this
to the
that allow
do irreparable
damage
social and economic order. In so “carrying a step further the fatal the
subtle
mind
of
Lenin
had
con-
For,
By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation. these governments are fast rendering impossible a continuance of the social and economic order. . . . But they have no plan for replacing it [6; p. 150]. It would indictment
be difficult
indeed
of inflation
and
presented
quences of he was
the Peace.
an inflationist
contrary,
in The
Anyone will
damning
policies
Economic
seeking
not find
not only does he display
to inflation, to offset
by Keynes.
to find a more inflationist
evidence
it there
a marked
but he also sees no compensating
than Consethat
; on the. aversion benefits
its evils.
conse-
p. 149].
blame
controls,
for
production
Summarizing
that
. . . as well as weak,
methods”
governments
inflation who
against vicious
and
businessmen
by governments
. . . reckless
on to a class
quences
words,
it against
is exploited
popular other
directs
of them
debtors
ultimate foundation of Third, inflation generates
social the
relaxes
conceived.”
based on the assumed stability of the value of In so doing, inflation disturbs contracts and
capitalism”
only
which
of the existing
the inflation
of the tendency
he said
in the
their
sciously
money.
creditors,
is not
process
and thereby
. . . into a gamble
risk and injustice,
than
compounding
value
of compelling
undertakings
In generating
misguided
the disincentives
however,
to the established doing they are
not only at security,
to price
and soon dries
that violates the principles of Besides its inequities, inflation riskier
in
For, by freezing prices at what are likely supply.” to be disequilibrium levels, controls constitute “a
free-
“arbitrary
of wealth-getting
Second,
four ways
of the
unforeseen
of riches” justice.
also renders
at least
element
“profiteer-
misallocation
expressed
what
and
critical
by controls,
of a spurious
anti-
for
such
damage
thereby
Regarding
at what He then
to resort
put occasioned
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose [6; p. 149].
to breed
regulation”
lead to resource
pressures.3
reinforces support
[6; p. 149].
was especially
of governments
[6;
and target
and constructive
tends
“price
Keynes
force
inflation
weakens
that may do more
itself.
the proprietors” a scapegoat
society”2
inflation
hunting”
society.
and
“the active
as
are
control,
capitalist
remedies
has the potenti-
of capitalist
and
called
Finally,
ality
they business
attitudes
the whole
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their By this method they not only confiscate, citizens. but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some [6; pp. 148-9].
of which
By making
2 Note Keynes [l; pp. porting
that the very inflationary evils denounced by are likewise stressed by Buchanan and Wagner 61-5]. This in a book, ironically enough, purto show that Keynes was an inflationist.
3 Buchanan and Wagner [1 ; p. 54] echo Keynes’ contention that the harm wrought by controls must be counted among the major costs of inflation.
REVIEW, JANUARY/FEBRUARY
1981
Policy
Advice
Keynes’
in Early
concern
swift
1920
with the dangers of inflation
enced his policy advice in the post-war when an outburst
of inflation
economy.*
Then
was:
is the least costly
What
tion ?
Should
stroke?
as now a crucial
gradualism
answer
when consulted
the Chancellor
he unhesitatingly
of dear money”
restriction
Asked
Would
. . . .
dose
[3; p. 458].
He
policy, entailing
and keep it at that for three years” inflationary creases
Keynes
argued
expectations
in nominal
then
interest
[3;
were
he argued,
ment
because
before
business
was
would
a wide
In
the high sharp
inin
sufficiently to [3; p. 463]. unemploy-
margin
be operating
. . .
essential
would not cause serious
there
of safety
below
full ca-
pacity.
described Reform.
A Tract
on Monetary
strongly
and
inhibit
advocacy
of tight
money
in this episode
capitalist
system.
randum
written
Chancellor
and
eventually
as much
after
inflation
and “strike
security,
stated
of
He feared,
with
the
he noted,
would generate
at the whole basis the
in a memo-
his meeting
of the Exchequer.
that persistent rest”
He shortly
and the
“social
un-
of contract,
capitalist
system
leading to “socialistic
control”
of
generally,” over indus-
The choice, he thought, was between “dear try. money or . . . socialization of the supply of capital” [3; p. 458-9]. clearly
G iven these alternatives,
in favor of dear money,
tained for the rest of his career. this in January
a position
was
he main-
He acknowledged
1942 when, looking back at his earlier
policy advice, he declared exactly
Keynes
that he would “give today
the same advice that I gave then, namely
a
may retard that
the details of Keynes’ advice in this episode see Howson [3]. All references in this section are to Howson, who reproduces the relevant passages from Keynes’ papers.
for in-
There
capital
economic
his
forma-
growth.
this
He
can happen.
disincentive
to saving. inflation class
save”
capacity
and destroys
which is a condition p. 29].
With
flowing
investing
atmosphere
saving
portion
and
accumulation
to
of confidence
of the willingness
a smaller
into
capital
of the
“the
to save”
of national
[7;
income
investment,
the
rate
of
And
according
to
falls.
since,
Keynes, “the national capital must grow as fast as the national labor supply” for “the maintenance of the same standard capital growth
of life,”
it follows
below the required
will lower living standards saving
[7;
and capital
of capital
that
rate
In short, by
formation,
inflation
capital/labor
each laborer
and a corresponding
a fall in
proportional
p. 29].
may cause a fall in the aggregate
ratio
has to work
drop in labor productivity
and output per capita. A
second
is the tion
factor
retarding
undercharging
and
the
the replacement because
cost rather
the depreciation
on capital
replacement charges
This
costs.
for
occurs
equipment
of original
ment costs rise with inflation.
infla-
provision
capital.
charges
on the basis
than
accumulation during
inadequate
of worn-out
depreciation
are computed
capital
of depreciation
consequent
(historical)
These
replace-
Thus when prices rise
calculated
on the basis
to replace
of
original
cost are too small
the worn-out
capital.
The result may be an unintended depletion of “In such conditions,” said Keynes,
the capital stock. a country
“can even trench
to make good its current
on existing
The capital
increasing goods
the real quantity
FEDERAL RESERVE BANK OF RICHMOND
For
currency
to live on its capital
money obscures
capital or fail
depreciation.”
one of the evils of a depreciating enables a community
4 For
his concern
the real value of past savings,
with)
on society
(1923)
express
ways
on
“the
ing rapid
inflict
Tract
diminishes
(i.e., the amount
could
A
than in the Tract.
three
his that
By eroding
clearly rested on his fear of the damage that continuinflation
stateof the
dangers
1923
Reform
long-term
at least
1942 years
had not lessened
in his
does Keynes
more
at
that would
of inflation,
earlier
Monetary
discouraging
Keynes’
of the 1930s
he had
Nowhere
to
Keynes’
He notes first the inflationary
crisis
p. 458].
prevailing,
rates
order to raise the real interest rate discourage borrowing and spending This,
in order
that given
p. 462].
about the dangers
specifies
to Chamberlain,
rate is necessary
Depression
flation
sufficient to prevent
that even the intervening
concern
tion
of monetary
would go for a financial
[3;
money, enough
consequences
chief fear is that inflation
the inflation-
to tolerate
according
go to whatever
this connection
February
“a stiff
the degree
he would be willing that “[he]
Chamberlain,
rates, to break
Keynes,
approach.
in early
monetary
to specify
to end inflation, indicated
reject
to halt the inflation
a steep jump in interest ary boom.
in one
recommended
urged a severely restrictive
Great
infla-
enough:
by Austen
and quick
ensue”
ment suggests
question
shock
of the Exchequer,
otherwise
or swiftly
was clear
and use the monetary
Accordingly, 1920,
policy
dose of dear
the market,
least some of the disastrous
the British
way to remove
it be done gradually
Keynes’
influ-
boom of 1920
threatened
and severe
break
value
of
temporarily
of the stock”
[7;
the
it “is that
it
unawares,
community’s
a diminution
in
pp. 27-8]. 5
Yet a third adverse noted,
effect on capital formation,
is the increased
inflation.
For
business
inflation
risk the extra
adds
“risk directly
in the value of money” for this extra
[7;
risk
resulting
to ordinary
business
arising
out of instability
p. 33].
To compensate
risk, businessmen
add a risk premium
to the rate at which they discount
the future,
higher
investment.
discount
rate
discourages
The discouraging vestment,
evils described cluded
(1)
by Keynes
and inequity
the resort
to spurious excess
part of the evils,” inflation
resulting and
and
This
resentment,
class
whose
remedies-e.g., profiteer-hunting
that constitute
discontent
produced
when directed profits
against
works
to discredit
enterprise
for the productive society
and the builder
Having capital
discussed
the business perceived of inflation, support
of society-“the
of the future”
prop of
[7;
p. 24].
the adverse effects of inflation
formation,
justice,
than the
and to weaken
element
economic
and social stability,
growth,
on
distributive
respectively,
Keynes
next
considers the alleged beneficial output effects of inflation. He notes that unanticipated inflation may temporarily
stimulate
economic
activity
profits and profit expectations. because prices
wages during
lagging
and
other
inflation.
behind prices,
producers
to
Likewise,
step
operations. profits
employment
adjustment
leads
Finally,
of fixed charges,
ity” requiring sponding these
But
fillip to
Keynes
would most likely
Moreover
he judged
their
reduces the real burden
“overstimulation
“over-exertion”
reasons
fall in the real
activity.
undue strain
interest
to expand
giving a temporary
sisted that any such stimulus small and short-lived.
of labor.
of market
producers
inflation
thereby
and to economic
an undesirable
rising wages
real wages fall, thus inducing
and the consequent
cost of borrowing
by raising rise, he said,
costs lag behind And with nominal
up their
the lagged
rates to inflation
Profits
of labor
[7;
the overall
inflation
against
when Keynes
6
it entrusts
individual
presumes a stable
employer,
rod of value,
and cannot
not survive-without
and production
bility
one”
its primary
continue munity
[7;
object
policy
For,
“if we are to
savings
of the com-
we must make it a prime
State
policy that the standard
of which they are expressed,
stable”
[7;
p. 16].
These
of an inflationist.
are an indication inflation
can-
It follows,
should make price sta-
goal.
into ‘investments,’ of deliberate
measuring-
p. 36].
to draw the voluntary
value, in terms
are hardly
hard-line
in the absolute
of
should
On the contrary,
of Keynes’
and his belief
savto the
be efficient-perhaps
the they
antipathy
to
necessity
of
price level stability.
activ-
p. 36].
For to be
weighed the benefits
of
the evils, he found the latter to far
price stability best when he declared that, beECONOMIC
Aspects
of the Tract
The analysis of inflation much in common monetarists.
money, money
in spirit,
ingredients
(2)
inflation
taken by today’s is discussed
the concept
balances,
(3)
embodying
as (1)
such standard
the quantity
of inflation
the monetary
The paragraphs these elements
below summarize in order
stereotype
approach
of
to ex-
the Fisherian interest rates.
Keynes’
to demonstrate
nonmonetarist
theory
as a tax on real
change rate determination, and (4) distinction between real and nominal
not the
with-
of an analytical- model that is remark-
ably monetarist monetarist
in the Tract has
with the position
Specifically,
in the context
contained
views on
that he was
caricature
of the
textbooks. Quantity The
Theory
Keynes
of Money
of the Tract was an unequivocal
herent of the quantity
theory.
“This
“is fundamental.
Its correspondence
open to question”
[7; p. 61].
as elucidated
the following
in the
monetarist
theory,”
Tract
ad-
he said,
with fact is not
His own version
same as the modern monetarist
and a correbenefits
Monetarist
be
outweigh the former and accordingly came down heavily in favor of price stability. He summarized his case for
because
investor
theory
minimal. Consequently,
of today, precisely
in-
it would constitute of industrial
on capacity
capitalism
is inexpedient
The individualistic
inflation.
are wrongly
as the cause rather than the consequence
and deflation
ing to the individual
sentiments
the social
by
is unjust
. . . , both are evils to be shunned.
be kept
“not the least
often doing more harm
windfall
from
wealth,
taxes,
they are designed to cure, and (3)
resentment
in-
inflation
profits
and the like-remedies
Others
of income
cause “inflation
he said, that the government
on saving, in-
in the Tract.
redistributions
price controls,
and the
were not the only inflationary
the injustice
inflationary (2)
effects of inflation
and growth
he from
is essentially
version
of the the
and embodies
elements :
(1) a money supply and demand theory of price level determination, (2) the notion of money stock exogeneity, implying money-to-price causality, (3) the concept of the demand for money as a stable function of a few key variables, and (4) a focus on the special role of price expectations in the money demand function. Regarding the money supply and demand theory of the price level, he said that “two elements” determine
REVIEW, JANUARY/FEBRUARY
1981
general
prices
quantity,
and the value of money.
present
circulation.
and
Second,
prospective,
“First,
of
the
[money]
the amount of purchasing
in
power
which it suits the public to hold in that shape” p. xviii]. price
Elsewhere
level
in the Tract
“depends
government
on the currency
and the currency
accordance
[7;
he says that the policy. of the
money
supply
quantity P, adjusts
of money”
[7;
he next of the
-depend
the variables
on
presented equation
to equate the real (price-deflated) money stock,
real demand for it, D.5 nominal
prices
the P
=
D, which says that the price level,
the given nominal
value of
M, with the public’s
He then proceeded
of the foregoing
money stock,
equation.
to analyze
Regarding
the
M, he said that it is an exoge-
nous variable
controllable
bank
such
that causation
runs from money to prices rather
than
vice-versa Keynes be)
money stock.
declared,
is “under the
of the central
possess
by the central
as claimed by some believers
demand-determined
the
banking
means
in a passive,
-The money supply, control
(or ought to
authorities”
to stabilize
who
prices
[7;
thus
p. 68].
With respect to the equation’s money demand component, D, Keynes stated that it is determined by several (2)
underlying
“habits,”
vantages
factors
(3)
including
interest
of keeping
rates
more
cash
with those of . . . investing inflation
(“the
trust
feel in the prospect rency)
or
it”),
(1)
(“the
“wealth,”
estimated
on hand and
distrust
which value”
ad-
compared
(4)
of the future
[7; pp. 62, 64, xviii].
expected the
public
of the cur-
Here is the monetarist
notion of the demand for money as a stable function of a few key variables. Of these four variables tention to the expected that
its
means
inclusion
pendent
of money
rapid increases tations tute
money)
paid particular
rate of inflation, money
pointing
demand
is not completely
supply.
For,
inflation
anticipated
according
(expectations
depreciation
implies
that money
to him, expec-
that consti-
cost
growth
out inde-
of
and thereby lower real money demand.
he noted,
at-
function
demand
in money supply may generate
of future
the
Keynes
in ‘the
that money
money
growth
affects
holding This, prices
through
magnifies
the
on inflation,.
causing
expectation
in the same
more
than proportionate
66].
Prices
tionary
outstrip
inflation
cost
of
real
cash
corresponding puts
rise
[prices]”
in
This
circulation
impact
of the
stimulates
turnover.
the
p.
infla-
reduces
and
upward
the
[7;
the anticipated
money,
balances
a
expectations
raising
holding
additional
magnifying
on
he said, because
rise in money
tations-induced money thus
effect
[inflation-
may produce
by generating
depreciation
of
to rise
due to causes which
of a further
and thereby,
demand
for
prices
direction,
money,
money growth,
future
impact
In his own words,
in [the money stock]
change
function.
initial
faster than the money stock itself. “a change
the price
in the. money demand
effect
theory
in the form =
indirect
set up a general
general
and demand,
theory
M/D or M/P
that
The
ary]
p. 71]. declared
and also indirectly variable
habits of the people, in
with the quantity
Having
both directly expectations
a
expec-
velocity
pressure
of
on prices,
of money
growth
on
inflation. Keynes actually
pointed out that this sequence occurred
1922-1923
in the
when prices
money stock.
German
of events had
hyperinflation
rose faster
of
than the nominal
He also noted that the same sequence
of events explained price-deflated
the perplexing
fall in the real or
money stock that had puzzled German
observers at the time. That is, he said that the expectations-induced flight from cash and the corresponding many
rise in velocity
to rise faster
thereby producing
had caused
than
prices
the nominal
the observed
in Ger-
money
shrinkage
stock
of the real
or price-deflated
money stock.
that expectations
of slower money growth that reduce
the public’s
“degree
Conversely,
of . . . distrust
he noted
of the future
value of the money”
will “lead to some increases in their use of it” resulting in a rise in the real money stock
[7 ; p. 47].
Finally,
Keynes
policy analysis, by an excess tary excess
employed the quantity
arguing
(1)
theory in his
that inflation
supply of money,
(2)
could stem from falls in money
as well as from rises in money supply, central bank possesses and counteract
and
employ this power to stabilize bility
he
movements
recommended impact
(4)
prices.
deliberate
in the money
the procyclical
(3)
the power to prevent
the former,
that
demand that the the latter it should
For price stacountercyclical
supply to offset
of changes
is caused
that such mone-
in money
or nullify demand
on prices.
5 Keynes [7; p. 63] employed a slightly different notation, writing the equation as n=pk, where n denotes the nominal money stock, p the price level, and k the quantity of real cash balances people desire to hold. He also presents a more elaborate version of the equation, namely n=p(k+rk'), where k and k’ denote real cash balances held by the public in the-form of currency and checking deposits, respectively, and r is the ratio of cash reserves that banks hold behind their deposit liabilities.
He thought that real money demand fluctuated with the state of business confidence, falling in booms, rising in slumps, and thereby amplifying cyclical movements
of prices.
“The characteristic
of the ‘credit cycle’,”
he said, “consists in a tendency of [real cash balances] to diminish during the boom and increase
FEDERAL. RESERVE BANK OF RICHMOND
during the depression”
[7;
p. 67].
To 7
counteract
these
contraction
in booms
“The
slumps.
he advocated and
monetary
said, “is when real balances to inflate
balances
are
expansion
practice,
are falling
in
and
not,
is when
as seems
the other way round”
he rejected
monetary
growth
real
to be our [7;
the monetarist rate rule
he
. . . and . . .
the supply of cash
rising,
In so stating, fixed
monetary
time to deflate the supply of cash,”
the time present
deliberate
p. 149].
case for a
(which
he argued
on the holders of the original . . . notes, whose notes [after inflation] are worth . . . less than they were before. The inflation has amounted to a tax . . . on all holders of notes in proportion to The burden’ of the tax is well their holdings. spread, cannot be evaded, costs nothing to collect, and falls, in a rough sort of way, in proportion to the wealth of the victim. No wonder its superficial advantages have attracted Ministers of Finance [7; p. 39]. He next explains
“is bound to lead to unsteadiness
of the price level”
transfers
when money
in favor
ernment.
demand
tionary
monetary
modern
world
he declared, currency”
fluctuates)
management
[7;
of paper currency “there is no escape
[7; p. 136].
p. 69].
the monetarist
cretion
in the conduct
that while he
case for rules instead of monetary
policy,
voice the modern
monetarist
complaint
tionary
movements
frequently
monetary
procyclical
rather
complained
engineered
monetary
monetary
he remained
which
the government
a strong
The
as a Tax
second
enunciates
monetarist
had
in booms con-
was rising inflation
advocate
of price
Harry
Johnson,
an essential inflation.
balances.
this inflation
Consistent
with
As noted
by the late constitutes
theory
that
resources,
resources
tained by [ordinary] raised by printing
approach
approach,
just
taxation”
notes,”
which
the command as real [7; p.
he writes,
over
as those 37].
ob-
“What
to appropriate balances vices.
is
“is just as much
and spent the proceeds
the quantity
of real balances
the public desires the government’s
process
can live by no other. the public find hardest government else”
It is the form of taxation
when it which
to evade and even the weakest
can enforce,
when it can’ enforce
nothing
[7; p. 37].
In discussing it is a tax on
just
and ser-
gets depends upon
the public
wishes
totaling
to
Assuming $36 million, of that sum
the additional
$9 million, just as successfully sum in taxation”
analysis
from the point
tax includes
product
from
(tax
base),
the latter
rises.
tax is
rate
(tax
respectively.
to the tax rate
That
is, when
the
raises the tax rate the tax base tends to
as people
holdings.
revenue.
First,
of the inflation
the tax base is not invariant
changing
tax
he makes four points.
and real cash balances
government
a
rate of inflation
that the yield of the inflation
the multiplicative
shrink
of the inflation of the optimal
that tax yield equals tax rate times tax
base, it follows rate)
equal to
as if it had raised this
of view of maximizing
In this connection the formula
the govern-
[7 ; p. 39].
discussion
sophisticated
notes
to itself an amount
seek to avoid the inflation
tax by
their habits and economizing on real money Were this not so, said Keynes, “there
would be no limit to the sums which the government the inflation
cash balances.
he says, falls on cashholders, 8
tax he says
can live by this means
on goods
rate is 2.5 percent.
real balances
of printing
but falls when
that “a government
cash bal-
cashholders
tax take is 25 percent
ment has transferred
tax”
the inflation
from
How much the government
Second,
Regarding
re-
newly
enables the government
real resources
taken from the public as is a beer duty or an income [7; p. 52].
with
as surely as if it had taken part of their earlier money
Keynes’
to
Keynes
is “a method of taxation”
uses to “secure
the government
as a
tax analysis
part of the quantity
argues that inflation real
Keynes
in the Tract is the concept of inflation
tax on real money
releases
acquires
or $9 million. Or, as Keynes himself put it in discussing the effects of the hypothetical 25 percent inflation tax on real balances of $36 million, “by ‘the
Balances that
In this way inflation
hold when the inflation
of discre-
at cut
services
issued money that is then added to private
notwithstanding,
ingredient
and
ances.
authorities
Money
goods
to be
in the pursuit
on Real
to money
is, he
stability. Inflation
proceeds
tend
than mitigating
intervention
balances
cashholders
and add the unThe reduced balances.
sources
aggravating
monetary
money this,
on goods and services
discre-
thereby
tionary
expenditures
for
and monetary
however,
real
To accomplish
outlay
demand
rather
to maintain
spent
in
These -policy errors
levels.
private
traction
and deflation.
just
desired
in-
rate of rise of cash
That
expansions
when money
holdings
to the gov-
say, 25 percent
equivalent
he did
when money demand was falling slumps
He notes that a given,
flation rate requires an
money creation
from cashholders
of dis-
that
than count&cyclical.
that the British
perversely
“In the
and bank credit,” from a ‘managed’
Note, however,
rejected
of discre-
how inflationary
rear resources
tax, Keynes The burden
stresses
that
of the tax,
could extract from the public by means of inflation” [7; p. 42]. Third, because the tax base shrinks with rises
i.e., ECONOMIC
in the tax
REVIEW, JANUARY/FEBRUARY
1981
rate,
the
government
will
realize
more revenue
from a tax rate rise only if it causes a
less-than-proportionate
fall in the base.
ment has to remember,” is not prohibitive medium,
than
yield the greatest that there revenue
depreciate
extreme,
[7 ; p. 43]. rate
occurs
and that a
imposition Fourth,
will
it follows
that maximizes
tax
where’ the percentage
in-
crease in the tax rate equals the percentage
shrinkage
against
tion rate.7
the country
prices
abroad.
exchange
from inflationary
rates an inflationary
would be offset by an
of real money
in the exchange
rate leaving
demand
rate
price
goods
with
respect to
is the concept
inflation,
the inflation
rate
of
that plays such a key role in the modern
monetarist
analysis
Monetary
of inflationary
Approach
A third monetarist
concept
analysis.
This
approach
rests
exchange
rate
between
determined
two
by the respective
national
respective
rate
currencies
is
money supplies
and the resulting
general
price levels.
Re-
garding the monetary approach, Keynes said that the foreign exchanges “depend . . . on the relative price levels established credit
[i.e.,
abroad”
here and abroad
monetary]
[7; p. 146].
policies He reached
combining
the quantity
purchasing
power
The quantity price
theory
parity
theory
of course
level. is determined of real
power
exchange levels
money
parity
of money
rate tends
parity doctrine by
operating From countries
through
by the
rates.
says that the general demand-adjusted
stock of money per
And the purchasing he explained, holds that the
to equal the ratio
of the price
concerned.
Taken
theory and the purchasing
imply that the exchange
relative
with
of exchange
by the
in the two countries
mined
and
demand.
doctrine,
gether, the quantity
here
this conclusion
theory
money stock, i.e., by the nominal unit
by the respective adopted
demand-adjusted relative
the foregoing
national
Keynes
inflate their currencies
to-
power
rate is determoney
stocks
price levels.6
concluded
that
necessity
domestic
price stability policy.
exchange
rates,
the domestic For
exchange,
for any country respect
the Keynes
fall
currency
this reason
rates trying
via the operation
With
monetarist
that, under
rise in foreign
equal and opposite
unchanged.
floating
absolute monetary
movements
were
an
to achieve of domestic
to his analysis
of
of the Tract belongs
in
camp.
in the
on the view that the national’
of foreign
he believed
today’s
to exchange
in the two countries
on their
Rates
used. by Keynes
approach
and demands
finance.
to Exchange
Tract was the monetary
effects
is unity.
of the tax-maximizing
infla-
exchange
That is, he contended
in the tax base, i.e., where the elasticity Here
that floating
in
rate and
with the higher
He also concluded
developing
if they inflate at
rate will appreciate
with the lower inflation
rates insulate a country floating
whereas
the exchange
be unprofitable,
is one inflation
and that
rate will stabilize, rates
favor of the country
an
gain”
exchange different
he said, “that even if a tax
it may
rather
“A’ govern-
that if both
at the same rate the
6 Note that this version of the monetary annroach ignores certain nonmonetary determinants of exchange rates, namely (1) the real terms of trade and (2) the relative prices of traded and nontraded goods, respectively. As pointed out by Keynes, these factors may be safely disregarded only when the source of exchange rate disturbance is of a predominantly monetary origin. Regarding such monetary shocks, he argues that they have in fact “been so dominant in their influence that the theory has been actually applicable with remarkable accuracy” [7; p. 82].
Nominal
versus
Real
Finally,
‘Keynes
employed
tarist
or Fisherian
Interest
Rates
in the Tract the mone-
distinction
between
nominal
real interest
rates, i.e., between the interest
ally charged
on loans and the inflation-corrected
and
rate actulevel
of that rate. With respect to the two rates he stated the following points. First, for any given nominal rate, inflation rate.
because ated
borrowers
dollars,
power
i.e.,
in money
the nominal may
resulting
to the nominal
rate
can repay their loans in depreciwhose
is less than the amount
Second, which
reduces the real rate below the nominal
The real rate falls relative
real
purchasing
originally
borrowed.
rate embodies
temporarily
in incomplete
expected
inflation
lag behind
actual
inflation
adjustment
of the nominal
rate. Third,
if the nominal
rate
does not fully reflect
rising prices, then even high market late into low or negative inflation.
As Keynes
rates may trans-
real rates after correction
himself
expressed
for
it,
in a period of rapidly changing prices, the money rate of interest seldom adjusts itself adequately or fast enough to prevent the real rate from becoming abnormal [7; p. 20]. Thus, when prices are rising, the businessman who borrows money is able to repay the lender with what, in terms of real value, not only represents no interest, but is even less than the capital originally advanced; that is, the real rate of interest falls to a negative value, and the borrower reaps a corresponding benefit [7; pp. 19-20].
7 In his words, “the rate of exchange can be improved in favour of one of the countries by a financial policy directed towards a lowering of its internal’ price level relatively to the internal price level of the other country” [7; p. 88].
FEDERAL RESERVE BANK OF RICHMOND
9
In such cases, high nominal to borrowers ing.
rates are neither
On the contrary,
rates
The
analytical
they are a bargain
to borrow-
tions express
contention
may correspond
during periods the modern
Fourth,
real
rates
and, therefore,
may
and spending,
argument
underlies
that nominal
indicator
during
periods
interest
prices.
of the degree
“It
period
of rising
of inflation,
implying
period
of falling
said Keynes,
[7;
money
“The
[nominal]
in periods merely
of
Fifth,
Irving time.
equiof the
at such times
inflation],”
said
[i.e.,
Keynes,
“is
of the real rate
points,
perhaps
Keynes
closely
all the monetarist
in his analysis of inflation. tarist harder
to square
textbooks.
the Keynes
of him as an out-and-out
as shown
above,
hostile
minimizing
its
throughout
toward
the
inflation,
benefits,
and
the
(1930).
basic
stance
Tract
as prices
It should
be noted
push inflation,
hence prices caused,
deploring
its evils,
for
its
quick
his mind in his A Treatise growth
on
ad-
and even
A Treatise If the
is unmistakably
that
of an
on Money
Tract
is famous
tax analysis,
for its celebrated
for profit.
when wages are
thereby
preventing
profit
trade
union
monopoly
duced endogenous labor
and other
inflation.9 ous”)
Rather
generated
most
for
profit income
(“spontane-
in wages caused by “the powers
That
of).
and
[8, p. 151].
Instead
rises
demand
for
factor
re-
profit-induced prices
of
demand
by prior
to Keynes,
of trade unions”
sources.
and
it is the in-
do not stem from autonomous
increases
cost-
by the exercise
result of an increased according
inflation
is called
rise in wages
power.
resources
For,
inflations
income
today
labor
is, a profit
in the and
other
inflation. stimulates
they
firms
to expand output and hence their demand for factors of production. This leads, to a bidding up of factor
prices
that raises production
and
eliminate
excess
inflations.
possess
factor three
annihilating
prices Seen
into costs
porary
stimulus
Having of inflation ing these
income
They eventually
inflation-engendered
and thereby
to economic Keynes
by compensating
they are a crucial part terminates
the. tem-
activity. between profit and
used it to analyze the effect
on output and economic effects
way,
to
features.
offset
Finally,
developed the distinction
income inflation,
this
inflations,
that transforms
profits
until
sufficiently
They need not cause a rise in
since they are largely
of the process
continues
rise
distinctive
of profit
the latter.
costs and gener-
process
profits.10
occur at the expense prices
This
he reached
growth.
two main
Regard-
conclusions.
as the ideal policy goal. (1930) for
its quantity
the Treatise
“fundamental
and the corresponding
anti-
in favor
are outrunning
occurs
for example,
It is even
he was ex-
former
inflation.”
margin
i.e., an exogenous
other
To be sure, there he tentatively
price stability
prices
to what
wages
For
the
“income
that Keynes’
does not correspond
nonmone-
and he still comes down strongly
of absolute
10
as fast
inflation.
conjectures that mild gentle inflation may have contributed to the industrialization of the West. But inflationist
when
of
and changes
labels
income inflation
ates income
inflationist.
calling
vances a theory of inflation-induced
inflation
occurs
falls in profit inflation.
Nor did he change
his
rising
of the
removal. Money
in profit
growth.
hence
of the Tract with the
caricature tremely
By contrast,
per unit
Of these two components
changes
and the latter
inflation
from
It is hard to reconcile
of the modern
in profit
in unit costs of produc-
respectively-Keynes
(and
elements
of the Tract with the stereotype Keynes
Profit
equa-
as the sum of two
increases
labor costs).
inflation”
stem
in the Tract, it is hard to escape the conclusion that, in the 1920s at least, Keynes was largely a monetarist Keynes
costs,
“profit
followed
the leading monetarist
In fact, considering
tion (chiefly
(1)
increases
price change-namely
activities
[7 ; p. 20].
these
Fisher,
for infla-
abnormality
the other side of the attempt stating
in the
to its preexisting
apparent
rate of interest
rapid
to steady itself” In
p. 20].
rates tend to’ fully adjust
tion and the real rate returns level.
with a
and a low bank rate with a
prices”
long run nominal
that
rates are a result not a cause of is for this reason,”
prices,
namely
of output, and (2)
the central
the fundamental
price level increases
components,
in
Constituting
core of the Treatise,
costs, leaving a large and growing
a high bank rate should be associated
librium
rates
nominal rates tend to be bidded up by eager
high market “that
interest
ease or tightness.
borrowers rising
borrowing
are an unreliable
of monetary
to economic
to low or negative
monetarist
themselves
a stimulus
that high nominal
of rapid inflation
fail to discourage
flation and profit inflation.8
and spend-
ers and, at least temporarily, activity.
onerous
to borrowing
nor a deterrent
distinction
theory-
is equally famous
equations
9 This
point
10 See 45].
Keynes
[8;
REVIEW, JANUARY/FEBRUARY
1981
of prices”
between income inECONOMIC
8 For a recent exposition of the “fundamental equations” and the corresponding concepts of income and profit inflation, see Patinkin [11; pp. 33-8]. What follows draws heavily from Patinkin. is stressed pp.
by
Patinkin
241-2]
and
[11; Patinkin
p. 37]. [11;
pp.
37,
First,
only profit inflation
has the power to stimulate
output and growth.
ist,
three
First,
cautionary
observations
he was referring
should
to gently
not to the rapid double-digit
inflation
not during income inflations,
nately
More
tions
. . . at times,
running
away from costs”
cisely,
profit
long-term
but during profit
that is to say, when
inflation
[9;
p. 137].
stimulates
real output.
both
It stimulates
infla-
prices
are pre-
current
and
inflation
output
stability.
current
long-term
employment.
And it stimulates
real output by shifting
to profit
thereby
permitting
income from wages
faster
tion and a higher rate of economic the effects
of profit
buoyancy
inflation
and enterprise
which are engendered;
however,
are possible
ning costs, finance
leaving
investment
means
growth.
obtained
p. 144].
only when prices margin They
of profit cannot
the very
and
the
profits. that constitute
inducement
of enhancing
what matters
to
inflation,
adjustment
of wages
unlike profit is
to give way to on the
to prices.
speed of
If the interval
rapidly to prices,
[9;
is
then infla-
or
Today
virtual price
of beneficial capitalist
examples
by diverting
era
Under
lating
enterprise,
latter
from
benefits,
wealth”
wealthy,
these conditions profit
to capital
feudal bonds, stimumarket-oriented
are no longer modern
curse rather than a blessing.
capitalist
ary policies for modern
persistently modern
rising
inflation-
faster
that Keynes
characterized than
in which
wages
wages
and
not
sometimes
tion will have little or no impact on capital formation
ahead of prices or at least follow them without thereby
adjust
slowly
considerable
if the interval
to prices, and
profit
then
is long and wages
the stimulus
inflation,
in
words, becomes “a most potent instrument crease of accumulated ing the interval, indeed
“quite long enough,” nation” England
p. 267].
historical
In this connection the
early
difference
between
and England
the amount
of wealth
ever have been built up by thrift
[9;
sistent This
stimulates behind
margin
of
by profit “that the in France The
inter-
growth
of profit
inflations
characteristic
wages
real earnings
if wages
lag
capital formation.
is hardly
in which
held
a large and per-
to finance
wage lag, however,
Keynes
only
leaving
delay
by the price
mentioned,
prices
to rise
rise
swiftly
of not
eroded by past inflation
but also to protect real earnings
from expected
future
inflation.
is that Keynes
would
The clear implication
have opposed these modern ing to his analysis
are
inflations,
income
which accord-
rather
than
profit
inflations. Accordingly,
it is not surprising
end of a long passage plishments
of profit
extolling inflation,
“I am not yet converted,
that Keynes,
the historical nevertheless
taking
everything
at the accom-
declared, into ac-
p. 145].
Lest one wrongly Keynes
inflation
substantially
only to restore
of a
vening profit inflation which created the modern world was surely worth while if we take the long view”
that
As previously
(and, per-
in 1500 could
alone.
increases.12
modern
industrialization
in 1700 and the amount
wiping out the profits generated
episodes-
he advanced
and France had been powered “It is unthinkable,” he declared,
inflation.
Regard-
felt that it had
he said, “to include
that
be
own
for the in-
the rise . . . of the greatness
[9; p. 141].
hypothesis
[8;
apparently
been long in particular
haps to contrive) the
wealth”
Keynes
may
Keynes’
was
by prices
and growth.
But
a
economies.
inflation
inflations
econo-
inflation
even slightly
it should be remembered to profit
to
For this reason Keynes
from recommending
referring
acThese
available
mies that are more likely to find secular
Finally,
inflation not only
the scope of the market.
market-oriented
and
of capital”
consumption
encouraging
however,
the
western
industrialization
but also by breaking
tivity, and widening
from
when
that slowly-creeping
resources
societies
economies.11
are taken
early-capitalist
p. 145 and 8; p. 268].
formation,
inflation
preindustrial
modern
might indeed have spurred
of no
such mild
in need of a rapid accumulation
it is conceivable
he was
inflation
was “very poor in accumulated
refrained
and growth
inflation
and this depends
short and wages adjust
economic
growth.
for investment
how long it takes for profit income
to
occur
where wages rise as fast as prices
is incapable
Second,
benefits,
are outrun-
It follows that income inflation,
inflation,
from this
These
a substantial
and thus annihilate the
“greatly
and growth.
in income inflations both
Europe
employment
his analysis
of his historical
spirit
and the good
[9;
Most
precisely,
per year.
and
that is unfortu-
secular
to capital-poor
pre-capitalist
In short, of
Second,
and not to wealthy
growth. “the
creeping
prices
would be viewed as constituting
chiefly
accumula-
but mainly the- rapid growth
years”
refers
capital
include
of capital wealth and the benefits in succeeding
real
today.
to slow
more than 1 to 2 percent
More
by raising prices relative to wages thus lowering wages and increasing
so common
referring
be made.
rising
“It is the teaching of this treatise,” he said, “that the wealth of nations is enriched,
conclude from the foregoing
of the Treatise was an out-and-out
that
inflation-
11 On 12 See
this
point
Haberler
FEDERAL RESERVE BANK OF RICHMOND
see Haberler [2;
[2; pp.
98-100].
p. 99].
11
count,
from
whilst
avoiding
stability [9;
a preference
of purchasing
p. 145].
British
at the
match between the location and skill mix of the labor
as its ideal objective”
is no reason
and an adamant
of inflation
The
proponent
the
publication
appears
to inflation of his
celebrated
General
he wrote
for The
There,
in discussing
unemployment
1937,
at the
concern argued
was preventing that the
1937
very high (“indeed, nevertheless
clear
inflation.
in
cycle
peak
of
that his primary In particular,
unemployment
rate,
as high as 12½
at its minimum
Theory,
policies for dealing
business
he made it abundantly
even after Times
he
although
percent”),
noninflationary
and this
was
level at
reductions
in unemployment
words,
noninflationary
cannot
be
unemployment reductions
consideration
where further
increases
approaching
in aggregate
the point
demand
would
“I believe,” he said,. “that we be purely inflationary. are approaching, or have reached, the point where there
is not much
general
stimulus
In so stating,
advantage
at the centre”
he identified
employment
rate
below which
industrial
tended
output that
of
point,
the noninflationary
bottlenecks
he said,
full
(NIFERU)
frustrate
effects
the in-
of aggregate
As for the existing
noninflationary
reduc-
could only be achieved by specific
policies designed
he attributed
pp. 11, 44, 65].
unemployment
ment rate of unemployment rate,
a further
policy so that mainly prices rise.14
tions in joblessness structural
[4;
and employment
demand expansion Beyond
in applying
to lower the full employitself.
high level of that unemployment it to structural
13 These articles are reprinted [4]. Unless otherwise noted, are to Hutchison.
rigidities
and discussed all references
in Hutchison in this section
ECONOMIC
preventing
The
cating
full employment
same articles
that there
was a fairly
at
expansionary
his main
inflation-even
show that, far from
itself.
aggregate
he insisted
there
suggest that Keynes inflation, displayed
policy
From
that unemployment expansion
is nothing
that must
of aggrepolicies
unemployment in the articles
rate to
had ever changed his mind about
On the contrary,
cern for inflation
advo-
demand
inflation.
the noninflationary
In short,
a
high level of unemployment
gate demand but rather by specific structural reduce
at
12 per-
at any cost, he clearly thought
be dealt with not by the general that
that
amply demon-
rate exceeded
be curbed- to prevent
level downward
contention
full employment
being an inflationist,
cent.
In
rate of unemploy-
the popular
is, his 1937 articles
was
and
by 30 years the modern
time when the unemployment
should
rigidities rate itself.
he shows the same con-
in his 1937 articles
that he earlier
in the Tract.
in the
14 The NIFERU concept also appears in the General Theory where Keynes asserts that! beyond a certain point, structural impediments (“a series of bottle-necks”) would prevent the noninflationary expansion of output and employment long before full capacity is reached. At the bottleneck point any further increase in aggregate demand would, in his words, largely “spend itself in raising prices, as distinct from employment” [10; pp. 300-l].
12
That
a
To this
noninflationary
structural
who advocated
far from
which
that
of the natural
he was an inflationist
expenditure
“require
policies to reduce
unemployment
concept
a
could only be achieved
that eradicate
He also refuted
of
In other aggregate
but rather
on the grounds
monetarist
that,
in need
than
in unemployment
specific structural
he foreshadowed
strate
demand
expansionary
so arguing, ment.15
pp. 11, 65-6].
[4; pp. 11, 14, 44, 66].
lower the equilibrium
cutback
was rapidly
by
em-
noninflationary
[4 ; pp. 11, 66].
in unemployment
via measures
[4;
and
in aggregate
“we are more
policies
technique”
end he advocated
rise
reductions
obtained
at any cost.
that the economy
demand”
demand-management different
output
to achieve
distributed
aggregate
must be curtailed to prevent he recommended a sharp on the grounds
that
greater
of demand.
to increases
he said,
mis-
is unfortunately
prevented
so that only prices
which demand pressure Accordingly, inflation. in government
rigidity
structure
from responding
of a rightly
to a substantial
and composition
It follows, today
of his continuing
in the 1930s
rigid” demand
(1937) evidence
and the location
sta-
of the labor force.
in particular
As he put it, “the economic ployment
of the potential
in four articles
early 1937.13 with
of price
force
economy,
foe
in 1937 when the unemployment
convincing
strong opposition
there
a determined
of warning
in The Times most
that he
On the contrary,.
rate was in excess of 10 percent Articles
to believe
that he remained
bility even to the extent danger
which,
aims
that position.
is strong evidence of inflation
today
at all costs,
power
There
ever changed
for a policy
deflation
15 Hutchison stresses this point, arguing that Keynes “suggested a similar concept to that now called-followinn Professor Milton Friedman-a ‘natural rate’ of unemployment in that he stressed ‘the unfortunately rigid’ elements in the British economy which made it undesirable to try to reduce unemployment further by the expansion of central government demand” [4; pp. 14-15]. Moreover,. “Keynes’s ‘different technique’ . . . corresponded, in some important respects, with what today, following Professor Friedman, is described as reducing the natural rate of unemployment” [4; p. 46]. Similarly, Samuel Brittan writes that “Keynes’s idea of the level of unemployment which would exist without demand deficiency seems astonishingly similar to Milton Friedman’s ‘natural’ rate of unemployment” [4; p. 63, n. 21].
REVIEW, JANUARY/FEBRUARY
1981
Concluding
Comments
The main conclusion was neither On
inflationist
his writings
deplored
inflation,
ingly of its dangers, In these respects
the extreme
depicted as being.
reveal
that
he con-
that he warned
unceas-
and that he urged that its avoid-
ance be made a primary tarists,
nor
that he is sometimes
the contrary,
sistently
of this essay is that Keynes
the subtle
nonmonetarist
early 1937 upon the first signs of a possible
objective
of public
policy.
he shared much with modern mone-
even to the point of using similar
analytical
tools. In that perspective, conception
that
a key question
he was
arisen.
Whether
Theory
(where
it
an inflationist
stemmed
he prescribed
from
the
Keynesians their
tendency
of some
to invoke
his magic
own inflationary
an
inflationist
respect
of monetary is
highly
to the General
his expansionist
policy
name
of
schemes,
or
over rules For,
as with
he did not intend for
prescriptions
would
modern
he
Keynesian
higher inflation tence
have
had policies
to apply to in-
flationary situations. On the contrary, as documented above, he abandoned these prescriptions in
but
designed
for
trade
off
His insis-
of the goal of absolute
would have been in direct conflict
inflationary
inflation. scorn
to
for lower unemployment.
on the primacy
stability
anything
policies.
Finally,
his
price
with such
support
of dis-
cretion
over rules did not reveal an inflationary
on his
part
policy
but
rather
was necessary
demand
for money
a belief
stability.
That is, he differed
monetary
rules
bility
per se, but rather There
employment. cretionary inflation given
proper
policy,
his
consistent
about
advocacy
pathy amply justifies Keynes
were
alive today
most determined
fighters
In
policy
he would against
short,
of discretionary was
to inflation.
F. A. Hayek’s
that dis-
of avoiding
stability.
of such
to
policy
output and
he thought
the efficacy
with his antipathy
to achieve
discretionary
to expand
price
of sta-
in his writings
the best means
achieving
his beliefs
of price
over the means
policy offered
in the
price level
from the proponents
On the contrary,
and
changes
to achieve
is nothing
that he equated
bias
discretionary
not over the objective
that objective. indicate
that
to compensate and hence
with the use of price inflation
modern
his reputation
undeserved.
Theory,
easy
in behalf
of discretion policy,
have
General
unemployment),
self-styled
full-employment
even from his own advocacy in the conduct
could his
deficit-spending
money policies to eliminate excessive or from
is how the mis-
Nor
perfectly That
anti-
judgment
that if
be “one
of the
inflation”
[4; p. 40,
n. 1]
References 1.
Buchanan, James M., and Wagner, Richard E. The Political Legacy of Democracy In Deficit: Lord Keynes. New York: Academic Press, 1977.
2.
Haberler, Gottfried. Inflation, Its Causes and Cures. Revised and enlarged edition. Washington, D. C.: American Enterprise Institute for Public Policy Research, 1966.
3.
“‘A Dear Money Man’?: Howson, Susan. Economic On Monetary Policy, 1920.” (June 1973), pp. 456-64.
4.
Hutchison, T. W. Keynes ians’ . . .? London: The Affairs, 1977.
5.
Keynes, John M. Indian Currency and Finance. 1913. As reprinted in Keynes’ Collected Writings, Vol. I. London: Macmillan, 1971.
6. Peace. 1919. Writings, Vol.
The Economic As reprinted II. London:
Versus Institute
Keynes Journal
7. As IV.
A Tract on Monetary in Keynes’ Collected Macmillan, 1971.
Reform. Writings,
1923. Vol.
8.
A Treatise on Money, Vol. I: The Pure Theory of Money. 1930. As reprinted in Keynes’ Collected Writings, Vol. V. London: Macmillan, 1971.
9.
. A Treatise on Money, Vol. II: The Applied Theory of Money. 1930. As reprinted in Keynes’ Collected Writings, Vol. VI. London: Macmillan, 1971.
The ‘Keynesof Economic
Consequences of the in Keynes’ Collected Macmillan, 1971.
reprinted London:
10.
The General Theory of Employment Interest and Money. 1936. As reprinted in Keynes’ Collected Writings, Vol. VII. London : Macmillan,
11.
Patinkin, Don. Keynes’ Study of Its Development. versity Press, 1976.
FEDERAL RESERVE BANK OF RICHMOND
Monetary Durham:
Thought: Duke
A Uni-
13