“Keynes’s supposed antagonism toward bullion arises from a misunderstanding of his famous statement in 1924 that the “gold standard is already a barbarous relic.” Many take this pithy remark to mean Keynes wanted to discard gold entirely from the international monetary framework…

…However, Keynes was actually against the economic pain often caused by the strict gold-standard system that had governed international monetary exchange for two centuries leading up to World War I. That regime did an excellent job of maintaining price stability, but its automatic mechanism for correcting economic imbalances through domestic deflation and unemployment spikes flew in the face of Keynes’s vision for smoothing out booms and busts…..But for Keynes, gold itself—and the importance of sound money—was a different story. So was exchange-rate stability, which went out the window between the world wars as the major powers used competitive “beggar-thy-neighbor” devaluations that wreaked havoc on global trade and prosperity. Germany and France suffered currency collapses, Britain catastrophically overvalued sterling, and Franklin Roosevelt set the gold price of the dollar each morning from his bed, on at least one occasion based on his lucky number. The result was disastrous…..Keynes outlined his ideal postwar monetary system in December 1941, and his ideas bore fruit at the international conference in Bretton Woods, N.H., in 1944. He envisioned a system where exchange rates were fixed against each other (and gold), and the international community would deal with imbalances through a new clearing union. Only in extreme cases would there be a managed devaluation. Keynes also envisioned a common world currency he called bancor—literally “bank gold”—which would also be fixed against bullion and all other currencies and used to settle governmental balances…..Keynes and his contemporaries recognized that gold has been valued as a monetary metal for millennia in virtually every human civilization, and its universal appeal was why he wanted it as part of his system. “We do not take any action injurious to the position of gold,” he assured European allies in a speech in 1943 to rally support for his plan. “The world being what it is, it is likely the confidence gold gives can still play a useful part.”…. Were Keynes alive today, he would likely be arguing along with German Chancellor Angela Merkel for more monetary discipline and a return to a more balanced international system. No doubt, however, his neo-Keynesian acolytes would be dismissing his concerns as hopelessly outdated and reactionary…. If he (Keynes) took in today’s economic vista of near-zero interest rates and quantitative easing, it is clear that he would be buying gold hand over fist—regardless of what his disciples might think.”, Richard Hurowitz, “What Keynes Would Think of ‘Neo-Keynesians’”, The Wall Street Journal, September 21, 2015

Opinion

What Keynes Would Think of ‘Neo-Keynesians’

Unlike his acolytes, he understood the value of gold and the dangers of currency debasement.

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John Maynard Keynes in 1941. PHOTO: BETTMANN/CORBIS

By Richard Hurowitz

As the Federal Reserve continues to struggle with when to place its foot ever so slightly on the brakes of a historic monetary expansion, I’m reminded of Richard Nixon’s words in 1971 when closing the gold window in the face of a run on the dollar. Of this dramatic repudiation of gold as a monetary metal Nixon famously declared, “I am now a Keynesian,” more often misquoted as “We are all Keynesians now.”

British economist John Maynard Keynes probably would have been horrified by this attribution. Nixon’s announcement was, after all, a coup de grâce delivered to Bretton Woods, the international monetary system of which Keynes was a principal architect. More important, he would never have thought desirable a world where currencies are backed by nothing more than a governmental promise to pay while the printing presses whirled unchecked.

Policy makers today wrap themselves in the legitimizing mantle of Keynes in much the way many politicians claim the legacy of Ronald Reagan. But while the idea of increased government spending to counteract the business cycle hails directly from Keynes, he would have considered quantitative easing’s frenzied asset buying beyond the pale and been puzzled that his theories are associated with aggressive currency debasement and a rabid hostility to gold.

Keynes’s supposed antagonism toward bullion arises from a misunderstanding of his famous statement in 1924 that the “gold standard is already a barbarous relic.” Many take this pithy remark to mean Keynes wanted to discard gold entirely from the international monetary framework. However, Keynes was actually against the economic pain often caused by the strict gold-standard system that had governed international monetary exchange for two centuries leading up to World War I. That regime did an excellent job of maintaining price stability, but its automatic mechanism for correcting economic imbalances through domestic deflation and unemployment spikes flew in the face of Keynes’s vision for smoothing out booms and busts.

But for Keynes, gold itself—and the importance of sound money—was a different story. So was exchange-rate stability, which went out the window between the world wars as the major powers used competitive “beggar-thy-neighbor” devaluations that wreaked havoc on global trade and prosperity. Germany and France suffered currency collapses, Britain catastrophically overvalued sterling, and Franklin Roosevelt set the gold price of the dollar each morning from his bed, on at least one occasion based on his lucky number. The result was disastrous.

Keynes outlined his ideal postwar monetary system in December 1941, and his ideas bore fruit at the international conference in Bretton Woods, N.H., in 1944. He envisioned a system where exchange rates were fixed against each other (and gold), and the international community would deal with imbalances through a new clearing union. Only in extreme cases would there be a managed devaluation. Keynes also envisioned a common world currency he called bancor—literally “bank gold”—which would also be fixed against bullion and all other currencies and used to settle governmental balances.

Keynes and his contemporaries recognized that gold has been valued as a monetary metal for millennia in virtually every human civilization, and its universal appeal was why he wanted it as part of his system. “We do not take any action injurious to the position of gold,” he assured European allies in a speech in 1943 to rally support for his plan. “The world being what it is, it is likely the confidence gold gives can still play a useful part.”

Keynes understood that sound money and stable exchange rates were necessary conditions for world prosperity and peace. Contrary to popular belief, he believed that in most cases currency devaluations were counterproductive, their benefits often outweighed by increased domestic costs and the undermining of sovereign credit. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency,” Keynes observed in 1919. He consistently argued that a sound currency was critical to a functioning free economy. He understood that such a currency would ultimately create much greater wealth than the endless and vicious cycle of improvisational debasement we see playing out globally today.

Were Keynes alive today, he would likely be arguing along with German Chancellor Angela Merkel for more monetary discipline and a return to a more balanced international system. No doubt, however, his neo-Keynesian acolytes would be dismissing his concerns as hopelessly outdated and reactionary.

Keynes was an economic theorist, but he was also a clear-eyed market analyst, and a passionate and committed speculator for his own account and for Cambridge University. If he took in today’s economic vista of near-zero interest rates and quantitative easing, it is clear that he would be buying gold hand over fist—regardless of what his disciples might think.

Mr. Hurowitz is an investor and the publisher of the Octavian Report.

Posted on September 21, 2015, in Postings. Bookmark the permalink. Leave a comment.

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