Keynesian "Easy Money" Is Nothing
But Currency Devaluation
April 12, 2012
(This item originally appeared at Forbes.com on April 12, 2012.)
“Keynesianism” is the label I’m using here for what is actually the
modern representation of Mercantilism. Mercantilism was conventional
economic thinking in Britain in the 1600-1750 period before being
swept aside by the great Classical economists. Virtually all
mainstream academic economists today are
Keynesians/neo-Mercantilists by this measure, although they probably
would not label themselves such. Part of the career strategy of most
any academic today is to apply a veneer of novelty or innovation to
what are in fact ancient ideas.
In the 1930s, the failure of the economists of the time to
adequately analyze and remedy the Great Depression – indeed, they
were a major cause of the Great Depression due to their fondness for
“austerity” including immense tax hikes – caused the political
pendulum to swing back toward the Mercantilist pole, where it has
remained ever since.
The Keynesians are very fond of hypercomplication, but in the end,
their policy prescriptions typically don’t amount to much more than
government deficit spending spending and some form of “easy money”
policy. I say that this “easy money” policy is basically just
a policy of currency devaluation.
Now, here’s a funny thing: the Keynesians themselves very rarely
promote outright currency devaluation, at least for their home
countries. They are less shy about smaller foreign countries – like
Greece today, which all the Keynesians say needs its own currency
which can be conveniently devalued. In the 1980s or 1990s, the IMF
was always busy recommending currency devaluation to smaller
countries around the world, with the usual dismal results.
This pattern also goes back to the 1930s. During the 1931-1933
period, most of the major countries of the world devalued their
currencies. (France was the laggard, devaluing in 1936.) These were
not conducted by central banks as part of any sort of “easy money”
policy, involving interest rate targets, “quantitative easing,”
“Operation Twist,” “Long Term Refinancing Operations,” “central bank
swap agreements,” “acting as a lender of last resort,” “nominal GDP
targeting,” or any other silly ad-hoc rationale for printing too
much money. They were done essentially (especially in the U.S. case)
as outright policy decisions of the executive branch.
This proved to be unpopular. Already by 1934, governments were
getting tired of “beggar thy neighbor” currency devaluations, and
agreed to cease any further steps in that direction. They quietly
settled back into a worldwide gold standard system, which was
formalized in 1944 as the Bretton Woods arrangement.
Thus, when Keynes’ book The General Theory of Employment, Interest
and Money was published in 1936, the political tide had already
moved away from an explicit policy of currency devaluation. I often
think of the book not so much as a how-to guide for policymakers –
it is far too incomprehensible for that – but rather as a guide for
career economists to make a living in the new political environment.
Remember, mainstream economists looked pretty bad at that point, and
you didn’t want to lose your economist job because it was the middle
of the Great Depression.
Thus, led by Keynes’ example, the new Keynesian economists adopted a
strategy of hypercomplication involving a lot of abstruse
mathematics, and a dizzying array of various “easy money” rationales
– without ever mentioning the now-unpopular “currency devaluation” –
to give politicians what they wanted. What politicians wanted was by
then established by the precedent of the past five years or so: an
excuse for big government deficit spending, and some quick and dirty
way to slap the economy into good enough shape in the short-term to
get re-elected, like an “easy money” policy.
“Currency devaluation” is pretty easy to understand, and already
politicians had proven capable of doing it without the assistance of
academic economists. The hypercomplication gave economists a
rationale to maintain their treasured sinecures as high priests of
economic gobbledygook, which was fine by the politicians as long as
they came up with the desired conclusions.
Usually the “easy money” arguments of today’s neo-Mercantilists
revolve around some interpretation of “lower interest rates,” as a
way to ultimately resolve unemployment, as explained by the title of
Keynes’ book. The funny thing about this is, the existing gold
standard system had always provided rock-bottom interest rates. From
1825 to 1914, a period of 90 years, the average yield of the British
Consol bond was 3.14%! This was a government bond of infinite
maturity, comparable to today’s 30 Year U.S. Treasury bond.
Wasn’t that low enough? It was low enough.
The average yield of the U.S. long-term (20-30 year) government bond
was 3.46% in September 1929 and declined steadily to 2.01% in
December 1940. Except for the devaluation of 1933, this was all with
the gold standard, without any overt “easy money” policy from the
From 1934 to 1940, the average yield of the 3-month Treasury bill
Certainly no problem with high interest rates there.
Even today, with the Federal Reserve undertaking a barrage of
unprecedented steps to “lower interest rates” in the Keynesian
fashion, the yield of the 30-year Treasury bond is 3.19%. Is that
the best you can do? By gold standard metrics, that kinda stinks.
Britain did better than that, for ninety years straight, until being
distracted by World War I. This with a bond not of 30 year maturity,
but infinite maturity! Hey Ben Bernanke, how long can you tread
Any bond investor will tell you that, assuming a currency of stable
value such as is provided by a gold standard system, yields on
high-quality debt will tend to decline in a recession. Thus,
declining interest rates is a natural feature of a capitalist
economy with a gold standard system in a recession, and doesn’t need
to be artificially manufactured by some “easy money” policy. The
only purpose of these various “easy money” techniques is to induce a
decline in currency value.
“Inducing a decline in currency value” is a euphemistic way of
saying “currency devaluation.” All of the Keynesian funny-money
tricks – notably the artificial decline in unemployment that Keynes
aimed for – don’t work unless the currency declines in value. How
would they? The gold standard system already provided very low
However, instead of a bald-faced act of official policy, where
everyone knows exactly who is responsible, you could blame the
resulting currency decline on “speculators” or the “free market,” or
whatever else happens to be politically expedient that day.
That’s why I say that, when you get past the smokescreen of bluster,
rationalization, and silly math, Keynesian “easy money” is nothing
but currency devaluation.