Keynes Was Right

The influence of economist John Maynard Keynes (1883–1946) is still profound in government circles. I say government, instead of economic, because economics is involved with human behavior, and government is about the regulation and control of that behavior. An economist who can provide the rulers with a plausible justification for their control of the population is a valuable asset to any government, as Keynes was to his.

The full flowering of Keynes’ economic thought occurred toward the end of his career, when he "discovered" the mistake of classical economists, who held that, when goods were in surplus, the best role of government was to allow wages and prices to fall, until an equilibrium was resumed. Falling prices would stimulate consumption, in other words. Supply would create demand.

Not so, said Keynes. The best way to stimulate consumption was via spending by governments. To "prove" this theory Keynes developed highly sophisticated arguments, involving terms and concepts of his own, such as "multipliers," "the marginal efficiency of capital," "liquidity preference," and others. In 1944, the British White Paper on Employment Policy said that "the government accepts as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war." In this country, the Employment Act of 1946 stated that "The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to – promote maximum employment, production and purchasing power."

Sweden, Canada, and Australia adopted similar policies. Keynes gave the whole thing respectability, which, in fact, is an odd term to use regarding Keynes, a member of the Bloomsbury group of leftist amoralists.

But Keynes, earlier in his career, expressed different economic views, in a slight book called The Economic Consequences of the Peace. He had attended the Paris Peace Conference in 1919 as technical adviser to Prime Minister Lloyd George, but resigned his post in protest of what he regarded as outrageous demands being made upon a prostrate Germany for reparations. His book (it is available on the internet) deals with the economic condition of Europe prior to the war, the Conference itself, with interesting portraits of the attendees, the Treaty which resulted, and reparations. Keynes saw no ready solution, which "leads me to a necessary digression on the currency situation of Europe." What a digression!

It begins: "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, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. – As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

"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." Amazing words, predicting with great accuracy what would happen in Germany just a few years hence, as prices were raised weekly, then daily, then hourly, and "money" was printed so rapidly that it was blank on one side. Has the "existing basis of society" been overturned in America by inflation? If so, how many have made the diagnosis?

Speaking of various European currencies, Keynes writes: "But while these currencies enjoy a precarious value abroad, they have never entirely lost – their purchasing power at home. A sentiment of trust in the legal money of the State is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value. To their minds it appears that value is inherent in money as such, and they do not apprehend that the real wealth, which this money might have stood for, has been dissipated once and for all." Our Federal Reserve System assures us that it is the people's confidence in it that makes our money useful. There certainly isn't anything else, as Keynes observed eighty-three years ago.

Price controls were instituted, briefly, by President Nixon, who, in 1971, declared himself a Keynesian. In 1919, however, Keynes saw the inevitable failure of such controls, while unable to offer any satisfactory alternative. "The presumption of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. – If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer." Today, that "regulation" takes the form of taxation, being much more agreeable than price controls, especially since the people seem easily convinced that their high taxes are paying for "good" things, like protecting the environment, and assisting backward nations.

In short, Keynes foresaw exactly the problems which would afflict the countries whose governments adopted his theory. Of course, he may have believed that gold would provide some sort of brake to rampant inflation, although he was hardly an advocate of a gold standard. In any event, doing away with any tangible form of money opened wide the door to the economic problems he anticipated. Governments continue to accept his belief that they can spend the country into prosperity, while ignoring his earlier warnings of disaster if they attempt to do so.

July 22, 2002

Dr. Hein [send him mail] is a semi-retired ophthalmologist in St. Louis, and the author of All Work & No Pay, which will soon be available at