In the debate surrounding actions to be taken to alleviate the current financial crisis, the name of John Maynard Keynes, by consensus considered to be the greatest economist of the first half of the 20th century, tends to be bandied about like some kind of a badminton shuttle cock. The truth is that today almost everyone is a Keynesian of sorts, as the idea of the Federal government continuing to fiddle as Rome starts to burn is practically inconceivable even to free-market fundamentalists. While Keynes’ economic treatises are meant for experts in that dismal science, Keynes spent much of his career simultaneously working, when not a government official, as a businessman, academic, and journalist, and it may prove interesting to take a brief look at some things he wrote for the British and American press in the run-up to what was then called “the slump.” The quotations are taken from the volume, Essays in Persuasion, published by W.W. Norton, in the section titled “Inflation and Deflation.” Note the fundamental point first made, that, as it is the State that establishes money value to start with, it’s inconceivable to keep the State out of what follows. Second, that what Keynes most feared was the introduction of socialism or communism in the West, a real danger in the 1920s and 1930s. His work was directed toward reinforcing the viability of the capitalist system. Finally, while there are striking similarities between the environment in the late 1920s and that existing today in many nations, one significant difference is that the England of his day remained an exporting nation, although greatly saddled with debts following from its leadership in World War I. And while the danger of petroleum imports to Britain’s balance of payments was already foreseen, its impact was not near as severe as that in the US today. Most importantly for present purposes, he seeks to explain why deflation, the prospect of which the American economy faces today, is such a great danger. In any case, here’s a little something of what Keynes said then: “Yet Money is simply that which the State declares from time to time to be a good legal discharge of money contracts…. “Each process, Inflation and Deflation alike, has inflicted great injuries. Each has an effect in altering the distribution of wealth between different classes, Inflation in this respect being the worse of the two. Each has also an effect in overstimulating or retarding the production of wealth, though here Deflation is the more injurious…. “What moral for our present purpose should we draw from this? Chiefly, I think, that it is not safe or fair to combine the social organization developed during the nineteenth century (and still retained) with a laisser-faire policy towards the value of money…. If we are to continue to draw the voluntary savings of the community into “investment,” we must make it a prime object of deliberate State policy that the standard of value, in terms of which they are expressed, should be kept stable…. “We see, therefore, that rising prices and falling prices each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes,—particularly to rentiers and is therefore unfavourable to saving. The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production, in their endeavour to avoid loss to themselves; and is therefore disastrous to employment…. “The Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one…. “For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which the distinguishing characteristics are possessed in different degrees by the weather, the birth-rate, and the Constitution,—matters which are settled by natural causes, or are resultant of the separate action of many individuals acting independently, or require a Revolution to change them.”
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