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Apr 15, 2008 3:00 pm

Keynes versus Mises on Gold and Money

According to David Myddelton, Keynes wrote in his first book, Indian Currency and Finance, published in 1913: “A preference for a gold currency is no longer more than a relic of a time when governments were less trustworthy in these matters than they now are.” This arrogant and stupid statement might well serve as the motto of the next century of government monetary mismanagement--a sorry performance for which Keynes himself bears substantial responsibility and under which the world continues to suffer with no relief in sight. (N.B. I do not have access to Keynes’s book, so I am relying on the accuracy of Myddelton’s quotation.)

Once again, we may regret that Keynes’s German was so poor. Otherwise, he might have understood better and taken to heart what Ludwig von Mises wrote in his first book, published in 1912, Theorie des Geldes und der Umlaufsmittel (first English translation, The Theory of Money and Credit, 1934). In that event, the world might have been spared an enormous amount of unnecessary grief.

Or maybe not. We often suppose that but for the words or deeds of a particular “great man,” the course of history would have been different. But where there is one fool, there may be another. Without Keynes, someone else’s very similar ideas might have taken hold with equally unfortunate effect. Besides, ideas--good, bad, and indifferent--are always contending for acceptance and for influence over actions. Those who propound pernicious ideas deserve censure, but those who accept bad ideas must also bear a share of the blame for their evil consequences.

Crossposted at The Beacon.

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Robert Higgs - 4/18/2008

When I referred to the "century of government monetary mismanagement--a sorry performance for which Keynes himself bears substantial responsibility," I had in mind not that Keynes was a "crypto-inflationist," but rather that Keynes's fiscal-policy proposals, derived from THE GENERAL THEORY, and his contributions to the establishment of the Bretton Woods arrangements both led inexorably, given the prevailing political realities, to extreme debasement of the currency. Strict adherence to a genuine gold standard would have precluded this outcome and would, more generally, have contributed mightily to restraining the growth of government--notwithstanding the slur aimed at "gold bugs."

The greater weight of my comment, however, I intended to lay on my characterization of Keynes's 1913 statement as "arrogant and stupid" because of his expressed reliance on the trustworthiness of modern-day government's economic policy-makers. Throughout his career, Keynes repeatedly expressed confidence that great powers might well be placed in government so long as its policy continued to be shaped by--well, by himself, most of all, but if he were not available, then by the next-keenest members of the best and brightest. As he wrote in an oft-quoted letter to Hayek, after the publication of the latter's ROAD TO SERFDOM, "Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the way to hell if they were executed by those who think and feel wrongly." With friends like this, does a sound economy, or liberty in general, need any enemies?

Bruce Bartlett - 4/16/2008

Keynes was far more sophisticated on monetary policy than Austrians give him credit for. Read his "Tract on Monetary Reform." It's true that he was no gold bug, but neither was he a crypto-inflationist, as Higgs implies. The worst that can be said of him is that he was essentially a monetarist. This article develops this point more thoroughly:

Mark Brady - 4/15/2008

I just checked the original and what Keynes writes is, "A preference for a tangible gold currency is no longer more than a relic of a time when Governments were less trustworthy in these matters than they are now,..." (See p. 73 of the original edition, and p. 51 of the 1971 reprint, which modifies "Governments" to "governments" but is otherwise unchanged.)

In other words, David Myddelton omits the modifier "tangible" before "gold currency." This is significant, and the context confirms its significance, for Keynes is contrasting "gold in the pockets of the people" with gold in "the reserves of banks." Yes, Keynes favored a government-managed gold standard but that, as he points out, accords with the precepts of Ricardo and J. S. Mill.

As you would expect, I wouldn't defend such a system but it's worth pointing out that genuinely free banking with fractional reserves would likely lead to very little gold currency in circulation. After all, in Scotland under free banking, the banks issued one pound notes that circulated widely. (They were prohibited from any smaller denomination notes.)

Allan Walstad - 4/13/2008

Government really IS more trustworthy now.
Isn't It?

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