There Is No Consistency in Keynes's Use of the Term “Rate of Interest”; Keynes Also Fails to Adhere to His Own Theory of Interest (Liquidity Preference and Quantity of Money)

Let us consider first Keynes's failure to adhere to fixed meanings for his terms.

Keynes at times uses the rate of interest to mean a rate of discount, measuring the premium on present goods over future goods. This is implied in his initial definition of the marginal efficiency of capital, to which later reference is made on page 135 of this book. It is, moreover, made explicit by Keynes on page 93 of his book, where he says that, as an approximation, we can identify the rate of time-discounting, i.e., the ratio of exchange between present goods and future goods, with the rate of interest. Later, however, Keynes gives us a radically different theory of interest. He makes the rate of interest depend on liquidity preference and the quantity of money. And he holds that interest is not paid for the purpose of inducing men to save but for the purpose of inducing men not to hoard. He holds that if money is made sufficiently abundant so that it can satiate liquidity preference, it will pull down, not merely the short time rate of interest or the short time money rates, but also the whole complex of interest rates, long and short. The whole complex of interest rates (with a given liquidity preference scale) can be governed, and is governed, in his system, by the abundance or scarcity of money. Interest becomes a phenomenon of money par excellence. Strangely enough, however, we find Keynes playing with the notion of commodity rates of interest, or “own rates of interest,” the rate between future wheat and present wheat, and designating this rate as the “wheat rate of interest.” Every commodity can have its own rate of interest in terms of itself, and Keynes says that there is no reason why the wheat rate of interest should be equal to the copper rate of interest, because the relation between the spot and future contracts as quoted in the markets is notoriously different for different commodities. The reader will find whatever he pleases in Keynes about the rates of interest, though his formal theory is the doctrine that the quantity of money, taken in conjunction with liquidity preference, governs the rate of interest.

But Keynes does not adhere long to his own theory of interest. In the same volume, 29 pages later, he has abandoned it. After saying, on pages 167-168, that the supply of money in relation to liquidity preference will govern the whole complex of interest rates, long and short, on page 197 he criticizes the Federal Reserve banks for their open market policy, 1933-1934, on the ground that they purchased only short term securities, the effect of which “may, of course, be mainly confined to the very short term rate of interest and have little reaction on the much more important long term rates of interest.” And he calls upon the central banks to regulate all rates of interest by having fixed rates at which they will buy obligations of differing maturities, long and short.

There is no consistency in Keynes's use of the term “rate of interest” in this volume.

--Benjamin M. Anderson, “Digression on Keynes,” in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 199-200.

Following the Doctrines of Silvio Gesell Who Wanted to Create “Free Money,” Lord Keynes Wanted Credit Expansion to Perform the “Miracle” of Turning a Stone into Bread

The stock-in-trade of all Socialist authors is the idea that there is potential plenty and that the substitution of socialism for capitalism would make it possible to give to everybody “according to his needs.” Other authors want to bring about this paradise by a reform of the monetary and credit system. As they see it, all that is lacking is more money and credit. They consider that the rate of interest is a phenomenon artificially created by the man-made scarcity of the “means of payment.” In hundreds, even thousands, of books and pamphlets they passionately blame the “orthodox” economists for their reluctance to admit that inflationist and expansionist doctrines are sound. All evils, they repeat again and again, are caused by the erroneous teachings of the “dismal science” of economics and the “credit monopoly” of the bankers and usurers. To unchain money from the fetters of “restrictionism,” to create free money (Freigeld, in the terminology of Silvio Gesell) and to grant cheap or even gratuitous credit, is the main plank in their political platform.

Such ideas appeal to the uninformed masses. And they are very popular with governments committed to a policy of increasing the quantity both of money in circulation and of deposits subject to check. However, the inflationist governments and parties have not been ready to admit openly their endorsement of the tenets of the inflationists. While most countries embarked upon inflation and on a policy of easy money, the literary champions of inflationism were still spurned as “monetary cranks.” Their doctrines were not taught at the universities.

John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The “Keynesian Revolution” consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.” The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume's and Mill's views on miracles.

--Ludwig von Mises, “Stones into Bread: The Keynesian Miracle,” in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 305-306.

The Success of Keynesianism Is Due to It Providing an Apparent Justification for Deficit Spending Policies

The "Keynesian revolution" took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments.

This explains the quick success of his book. It was greeted enthusiastically by the governments and the ruling political parties. Especially enraptured were a new type of intellectuals, the "government economists." . . .

The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the "deficit spending" policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.

--Ludwig von Mises, "Lord Keynes and Say's Law," in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 319-320.

The "Neglected Prophet," Silvio Gesell, on Postponing Depressions Indefinitely by Keeping Money Rolling through Fear of Its Depreciation

Another precursor of Keynes was the "unduly neglected prophet, Silvio Gesell," the proponent of Schwundgeld (vanishing money). Gesell's book, Die Verstaatlichung des Geldes (1891), was well known in continental Europe, especially in Switzerland. But despite wide propaganda by clubs formed to spread his theories, it was not taken seriously either. The proposition that depressions could be postponed indefinitely by keeping money rolling through fear of its depreciation rather than by correcting maladjustments seemed too absurd.

--L. Albert Hahn, "Continental European Pre-Keynesianism," in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 288.