KEYNES ON INFLATION Thomas M. Humphrey Not the least of inflation’s consequences is the restrictive demand management policies to prevent damage done to the reputations of certain prominent it; that far from being an extreme nonmonetarist, economists. A case in point is John Maynard Keynes he shared the monetarists’ antipathy to inflation, (1883-1946). Once highly regarded for his brilliant endorsed their policy goal of price stability, and em- pathbreaking analysis of the causes of mass unem- ployed at least five monetarist concepts in his analysis ployment in the Great Depression of the 1930s, he is of inflation; and, finally, that far from advocating now given low marks for his views on inflation. full employment at any cost, he maintained that even Popular folklore has it that he was largely uncon- at high unemployment rates expansionary aggregate cerned with inflation from the start, that his subse- demand policy must be curbed to prevent inflation. quent preoccupation with unemployment led him to More precisely, this article demonstrates (1) that ignore it altogether, and that, as a result, he favored Keynes was always concerned with inflation, (2) expansionary measures to eliminate unemployment that this concern motivated hi’s advocacy of anti- regardless of their inflationary consequences. Since inflationary aggregate demand management policy on his death in 1946 his name (or at least the label at least two occasions (including once in the Great “Keynesian”) has been linked to such inflationist Depression of the 1930s), and (3) that there are slogans as “full employment at any cost” and “money enough monetarist elements in his analysis to qualify doesn’t matter.” It has also found an association him as at least a partial monetarist as far as inflation with the discredited concept of a stable enduring theory is concerned. trade-off between inflation and unemployment as well These points are documented in the following para- as with the equally discredited notion that the au- graphs, which summarize Keynes’ own views on thorities can peg interest rates and real economic inflation. As pertinent now as they were when he activity at any desired level simply by manipulating first presented them, his views are contained chiefly the policy instruments they command. On the policy in the following works: (1) Indian Currency and front his name is now popularly identified with ex- Finance (1913), (2) The Economic Consequences cessive government spending, mounting budget defi- of the Peace (1919), (3) policy advice given to the cits, inflationary money growth; and, in Britain at Chancellor of the Exchequer in February 1920, (4) least, with the idea that inflation can be contained A Tract on Monetary Reform (1923), (5) the two- with incomes policies and wage-price controls. In the volume A Treatise on Money (1930), and (6) a textbooks, his views are caricatured in. the stylized series of four newspaper articles published in The “Keynes versus the monetarists” manner as the Times in early 1937, one year after the publication opposite of the anti-inflationary views of the mone- of his famous The General Theory of Employment tarists. Small wonder that he has been widely per- Interest and Money (1936). Except for the General ceived as an inflationist and that our present inflation Theory, which deals mainly with unemployment and is often described as the legacy of Keynes.1 will not be examined here, these works are largely The purpose of, this article, however, it to show concerned with the problem of inflation. They are that the foregoing perceptions are wrong: that far examined in the order listed above to show the con- from being an inflationist, Keynes deplored inflation, sistency of Keynes’ anti-inflation attitudes over time. warned repeatedly of its evils, and recommended Early Writings 1 For a recent expression of this view see Buchanan and Keynes’ strong aversion to inflation is evident in Wagner [l] who assert that “Lord Keynes himself” must even his earliest work. It appears, for example, in “bear substantial responsibility” for our “apparently per- manent and perhaps increasing inflation” [1; p. 41. his Indian Currency and Finance (1913). There he “Without Keynes,” they write, “inflation would not be the clear and present danger to the free society that it emphatically rejects the argument that “a depreci- has surely now become. The legacy or heritage of Lord ating currency is advantageous . to trade,” con- Keynes is the . .intellectual legitimacy provided to . tending that any advantages derived from inflation deficit spending, inflation, and the growth of govern- ment” [1; p. 24]. are “only temporary” and that they “occur largely at FEDERAL RESERVE BANK OF RICHMOND 3 the expense of other members of the community” and a Press of which they are the proprietors” [6; and therefore do “not profit the country as a whole” p. 150]. By making business a scapegoat and target [ 5 ; p. 2]. He takes an even tougher attitude in his of vilification and control, inflation reinforces anti- Economic Consequences of the Peace (1919), con- business attitudes and weakens support for what demning inflation in the harshest possible terms. Keynes called “the active and constructive element in He says : the whole capitalist society”2 [6; p. 149]. Finally, inflation tends to breed such misguided Lenin is said to have declared that the best way to remedies as “price regulation” and “profiteer- destroy the capitalist system was to debauch the currency. By a continuing process of inflation, hunting” that may do more damage than the inflation governments can confiscate, secretly and unob- itself. Keynes was especially critical of the tendency served, an important part of the wealth of their citizens. By this method they not only confiscate, of governments to resort to price controls, which in but they confiscate arbitrarily; and, while the his view lead to resource misallocation and a reduced process impoverishes many, it actually enriches supply of goods, thereby compounding inflationary some [6; pp. 148-9]. pressures.3 Regarding the disincentives to real out- He agrees with Lenin that inflation has the potenti- put occasioned by controls, he said that “the preser- ality of destroying the basis of capitalist society. vation of a spurious value for the currency, by the force of law expressed in the regulation of prices, Lenin was certainly right. There is no subtler, no contains in itself, however, the seeds of final eco- surer means of overturning the existing basis of society than to debauch the currency. The process nomic decay, and soon dries up the source of ultimate engages all the hidden forces of economic law on supply.” For, by freezing prices at what are likely the side of destruction, and does it in a manner to be disequilibrium levels, controls constitute “a which not one man in a million is able to diagnose [6; p. 149]. system of compelling the exchange of commodities at what is not their real relative value,” and this He then proceeds to specify at least four ways that “not only relaxes production but leads finally to the rapid inflation works to weaken the social fabric and waste and inefficiency of barter” [6; pp. 149-50]. to undermine the foundations of the capitalist free- Summarizing the foregoing harmful consequences market system. First, unforeseen inflation, he says, of inflation, he concludes that governments that allow results in a capricious and totally “arbitrary rear- inflation to get out of control do irreparable damage rangement of riches” that violates the principles of to the established social and economic order. In so distributive justice. Besides its inequities, inflation doing they are “carrying a step further the fatal also renders business undertakings riskier and thereby process which the subtle mind of Lenin had con- turns “the process of wealth-getting . into a gamble sciously conceived.” For, and a lottery.” In generating risk and injustice, infla- By combining a popular hatred of the class of tion “strikes not only at security, but at confidence in entrepreneurs with the blow already given to social the equity of the existing distribution of wealth” [6; security by the violent and arbitrary disturbance of contract and of the established equilibrium of p. 149]. Second, inflation violates long-term arrange- wealth which is the inevitable result of inflation. ments based on the assumed stability of the value of these governments are fast rendering impossible a money. In so doing, inflation disturbs contracts and continuance of the social and economic order. But they have no plan for replacing it [6; p. 150]. upsets “all permanent relations between debtors and creditors, which form the ultimate foundation of It would be difficult indeed to find a more damning capitalism” [6; p. 149]. Third, inflation generates indictment of inflation and inflationist policies than social discontent and directs it against businessmen that presented by Keynes. in The Economic Conse- whose windfall profits are wrongly perceived to be quences of the Peace. Anyone seeking evidence that the cause rather than the consequence of inflation. he was an inflationist will not find it there ; on the. This discontent is exploited by governments which contrary, not only does he display a marked aversion “being many of them . reckless . as well as weak, to inflation, but he also sees no compensating benefits seek to direct on to a class known as ‘profiteers’ the to offset its evils. popular indignation against the more obvious conse- quences of their vicious methods” [6; p. 149]. In 2 Note that the very inflationary evils denounced by other words, governments actually responsible for Keynes are likewise stressed by Buchanan and Wagner causing inflation seek to shift the blame onto busi- [l; pp. 61-5]. This in a book, ironically enough, pur- porting to show that Keynes was an inflationist.