Saturday, March 6, 2010

Keynes: Let's Destroy the Value of your Money

This is part six of our discussion of John Maynard Keynes and his 1936 book The General Theory of Employment, Interest and Money.  So far, we have uncovered some very interesting and often outrageous ideas buried in the famous economist's most well known work.  Here is what we discussed in parts 1-5:
For part six we will discuss how Keynes promoted the destruction of the value of money.  This is commonly referred to by the euphemism inflation but, as we will see, Keynes went even beyond promoting a modest inflation target.  Keynes supported this despite correctly acknowledging that inflation and currency destruction in general hurts the poor disproportionately.

All quotes below can be verified for their accuracy by referencing the full text, which is available online for free here.

Chapter 19, Section II
Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expediency, and probably completed only after wasteful and disastrous struggles, where those in the weakest bargaining position will suffer relatively to the rest. A change in the quantity of money, on the other hand, is already within the power of most governments by open-market policy or analogous measures. Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter. Moreover, other things being equal, a method which it is comparatively easy to apply should be deemed preferable to a method which is probably so difficult as to be impracticable.

The question here is - what is the best method to lower employee wages?  Keynes argues that it is far better to reduce wages through inflation because it is less understood than a direct reduction in numeric value.  If one's goal is to fool the masses, then quite frankly we agree.

Chapter 19, Section II
In fact, a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.

Central bankers like Keynes know that from a psychological standpoint, stealing your money indirectly through inflation is the preferred method.  When someone promotes an inflationary policy, remember that this is what they are advocating - they want to fool you.

Chapter 20, Section III
For a time at least, rising prices may delude entrepreneurs into increasing employment beyond the level which maximises their individual profits measured in terms of the product. For they are so accustomed to regard rising sale-proceeds in terms of money as a signal for expanding production, that they may continue to do so when this policy has in fact ceased to be to their best advantage; i.e. they may underestimate their marginal user cost in the new price environment.

Since that part of his profit which the entrepreneur has to hand on to the rentier is fixed in terms of money, rising prices, even though unaccompanied by any change in output, will re-distribute incomes to the advantage of the entrepreneur and to the disadvantage of the rentier, which may have a reaction on the propensity to consume.

Not only did Keynes hope to fool the masses via inflation, but he hoped to fool entrepreneurs as well!  Fortunately for the entrepreneurs and other generally wealthy people, Keynes correctly recognized that inflation helps the rich at the expense of the poor, as Keynes describes here as well.  Note that fooling entrepreneurs by making them think there is more demand than actually exists, Keynes is promoting the boom and bust cycle that continues to plague our economic system.

Finally, Keynes went one step beyond promoting an inflationary policy.  He also promoted the use of currency with an expiration date, aka "stamped money."

Chapter 23, Section VI
He [Silvio Gesell, 1862-1930] argues that the growth of real capital is held back by the money-rate of interest, and that if this brake were removed the growth of real capital would be, in the modern world, so rapid that a zero money-rate of interest would probably be justified, not indeed forthwith, but within a comparatively short period of time. Thus the prime necessity is to reduce the money-rate of interest, and this, he pointed out, can be effected by causing money to incur carrying-costs just like other stocks of barren goods. This led him to the famous prescription of “stamped” money, with which his name is chiefly associated and which has received the blessing of Professor Irving Fisher. According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office. The cost of the stamps could, of course, be fixed at any appropriate figure. According to my theory it should be roughly equal to the excess of the money-rate of interest (apart from the stamps) over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment. The actual charge suggested by Gesell was 1 per mil. per month, equivalent to 5.4 per cent. per annum. This would be too high in existing conditions, but the correct figure, which would have to be changed from time to time, could only be reached by trial and error.

The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale. But there are many difficulties which Gesell did not face. In particular, he was unaware that money was not unique in having a liquidity-premium attached to it, but differed only in degree from many other articles, deriving its importance from having a greater liquidity-premium than any other article. Thus if currency notes were to be deprived of their liquidity-premium by the stamping system, a long series of substitutes would step into their shoes — bank-money, debts at call, foreign money, jewellery and the precious metals generally, and so forth. As I have mentioned above, there have been times when it was probably the craving for the ownership of land, independently of its yield, which served to keep up the rate of interest; — though under Gesell’s system this possibility would have been eliminated by land nationalisation.

Not only does Keynes and Irving Fisher want to destroy the value of your money but they want to nationalize your land (aka Communism). The bottom line is that Keynes and his followers want to stamp out the free market and steal your land, and thus freedom, because they think they know better than you.  It's all right there in black and white.
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