Keynes was a monetarist

IMGP1680The night after he had dined with the Washington Keynesian economists Keynes said to Sir Austin Robinson “I was the only non-Keynesian there”.  This quotation and evidence set out by T.W. Hutchinson in his Hobart Paperback Keynes v. The Keynesians suggest that there was and is a wide gulf between what Keynes  said and what was interpreted by the self-styled Keynesian economists which included Lord Kahn, Sir Roy Harrod, Joan Robinson, Lord Balogh, Frank Hahn, James Meade, to name but a few.

It is the purpose of this short essay to suggest that the views of Keynes were and are more closely associated with those of monetarism than any other school of thought.  In order to do this the key propositions of monetarism as set out by M. Friedman in the First Wincott Memorial Lecture entitled the Counter Revolution in Monetary Theory will be outlined.

Briefly stated, there is a consistent though not precise relationship between the rate of growth in the quantity of money and the rate of growth of nominal national income.  However the rate of monetary growth today is not very closely related to the rate of income growth today.  Today’s income growth depends on what has been happening to money in the past.  What happens to money today affects what is going to happen to income in the future.  In other words there is a lagged relationship between changes in the quantity of money and changes in nominal income.  On average a change in the rate of monetary growth produces a change in the rate of growth of nominal income about 6-9 months later.  The changed rate of growth of nominal income typically shows up first in output and hardly at all in prices.  On average the effect on prices comes about 6-9 months after the effect ion income and output.  Therefore the total delay between a change in monetary growth and a change in the rate of inflation averages something like 12-18 months.  Further to this inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.  Today governments control the quantity of money and its rate of change through their central banks, therefore inflation is always a government responsibility.

In his book “A Tract of Monetary Reform” Keynes supported much of this monetarist view.  Some quotations will illustrate this:-

“From 1914-1920 all these countries (1) experienced an expansion in the supply of money to spend relative to the supply of things to purchase, that is to say inflation”.

“What, then, has determined and will determine the value of the franc?  First the quantity, present and prospective, of the francs in circulation.  Second, the amount of purchasing power which it suits the public to hold in that shape”.

“When people find themselves with more cash than they require for such purposes, they get rid of the surplus cash by buying goods or investments, or by leaving it for a bank to employ or, possibly, by increasing their hoarded reserves”.

Throughout his book Keynes used the quantity theory of money, crudely stated MV=PT, to explain inflations and deflations, and he recognised the government role when he said “Therefore it is broadly true to say that the level of prices and hence the level of exchanges, depends in the last resort on the policy of the Bank of England and of the Treasury”.

There are then many similarities between the propositions of monetarism and the view of Keynes.  In a similar way there is evidence to suggest that the monetarist approach to managing the supply of money is one that was supported by Keynes.  Monetarist economists argue that the control of the supply of money is, under present circumstances, the responsibility of government.  Ideally the rate of change in the money supply should be linked in advance to the rate of change of output.  However without the necessary information to be precise the supply of money should be expanded by a steady and predictable amount each year.  5% has been suggested for the U.K.  This steady expansion will not allow deflation to occur and may cause a very mild rate of inflation if the growth in output is less than 5%.

In a similar vein Keynes said:-

“Thus inflation is unjust and deflation is inexpedient.  Of the two perhaps deflation is, if we rule out exaggerated inflations such as that of Germany, the worse, because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier.  But it is not necessary; that we should weigh one evil against the other.  It is easier to agree that both are evils to be shunned.  The individualistic capitalism of today, 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”.

“The main point is that the objective of the authorities, pursued with such means as are at their command, should be the stability of prices”.

“It would at least be possible to avoid, for example, such action as has been taken lately (in G.B.) whereby the supply of cash has been deflated at a time when real balances were becoming inflated – action which has materially aggravated the severity of the late depression”.

The last part of this second quotation illustrates the view Keynes had formulated during the Great Depression when government were contracting the supply of money in an attempt to return to the pre-war rate for the gold standard.  Out of this view came the Keynesian technique of demand management that was adopted in the U.K. after the Second World War.  It had been suggested by Keynes that during a period of time when the economy was inflating the government should budget for a deficit by returning demand to the economy.  Although the supply of money is rarely associated with techniques of demand management it is not too difficult to see that such a policy would produce monetary stability in line with the monetarist view of control.

There is much evidence in the writings of Keynes that his views are closely linked with that of the monetarist school.  Why then do Keynesians ignore the role of money in the economy?  Perhaps Keynes was aware of the effect of monetary contraction during the Great Depression and in order to persuade government to reverse their policy, he avoided highlighting the mistake of government and instead introduced new terminology which referred to expanding or contracting aggregate demand.  In this way Keynes could impose the required monetary discipline on the economy.  Unfortunately Keynesians talked only about demand and forgot about the importance of money.

  • UK, U.S.A, Russia, Poland, Japan, Sweden

John Hearn October 1979


2 thoughts on “Keynes was a monetarist

  1. Hmmm, another economist who has never read Keynes’ General Theory. If you just read the short two-page preface of that publication, perhaps you’ll understand why I say this.


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