The Keynesian Playbook – Though there are multiple versions practiced today, John Maynard Keynes advocated using monetary policy to manage/stimulate aggregate demand and thus smoothen the business cycle. In his book “The General Theory of Employment, Interest, and Money”, he advocated running deficits during times of recession and surpluses during good years to pay down the debt. Given the compulsions of democratic politics, deficit financing has become a permanent feature of almost all governments today.
Keynes wrote his book in 1936, supposedly as a solution to end the then-ongoing Great Depression. Of course, most of his assumptions regarding what caused the Great Depression were utterly wrong. Murray Rothbard’s “America’s Great Depression” accurately describes the causes as the highly interventionist policies (by the then-prevailing standards) of Herbert Hoover and Franklin Roosevelt as a response to the stock market crash of 1929.
Andrew Mellon’s advice (the then Treasury Secretary) – “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” – is often quoted to indicate the Lassiez Faire approach taken by Hoover. But as Rothbard explains, Hoover completely ignored the sage advice of his treasury secretary.
To add insult to injury, Roosevelt confiscated Gold from US citizens in 1933 through Executive Order 6102. These and other acts were a far cry from the “Capitalism / Free Markets” policies that Keynes believed the US Government was operating under.
As Rothbard explains in his book, these fiscal and monetary interventions prolonged what ought to have been a short recession into The Great Depression. Jim Grant’s book “The Forgotten Depression:1921: The Crash that Cured Itself” would be most appropriate to understand the correct policies to treat an economic downturn. The Government under Warren Harding in 1921 allowed the market corrections to run its course, and the malinvestments were cleared quickly. Incidentally, these excesses were created due to the monetary interventions of World War I (1914-1919), during which the National Debt grew at an unprecedented CAGR of 55+%. The monetary excesses that caused the 1929 crash were substantially lower in comparison.
Despite the above-mentioned monetary interventions, these remained exceptions to be implemented only under what was seen as extenuating circumstances e.g. World War and The Great Depression. Keynes’ policies based on “deficit financing by Central Banks” could not be implemented under the Gold Standard during normal situations. Even the diluted version, i.e. The Gold Exchange Standard of Bretton Woods, limited the interest rate manipulations and the borrowings by the Federal Government.
Hence, it’s unsurprising that Keynes referred to Gold as a “Barbaric Relic” as it prevented widespread adoption of his policies. But what is surprising is that while most Economists and Central Bankers have adopted the Keynesian playbook as a policy tool, they continue to retain Gold in their reserves; albeit nowhere close to a level where they can back their issued currency with the gold they hold.
It would not be until the 1960’s that a modified version of the Keynesian Playbook would be attempted in the US. It was the period in which the thought process of “a little deficit spending is good” developed amongst economists. The US would pay for this decade of deficit spending (1960s) with the stagflation of the 1970s. The 1970s stagflation should have made the Economists recognize that the Keynesian playbook was a very flawed one, i.e. indulging in deficit spending has severe consequences, though perhaps much delayed in terms of timelines.
There are no free lunches and all monetary inflation (i.e. deficit spending) would eventually show up as price inflation is just an economic axiom. The sooner the world recognizes that this deficit spending, or more appropriately, the growth in National Debt, is “The Inflation” the better it will be. The Monetary Inflation that the world initially loves, is exactly the one that produces the Price Inflation that the world hates.
