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Keynes and free banking

Since my last post was about Hayek, I will now say something about John Maynard Keynes. Keynes remains influential today for three reasons. One is that he led the kind of life every economist would like to lead. He was clever; became rich; knew most of the people worth knowing at the time in politics, finance, and the arts; and served Britain superbly during two world wars. The second is that he wrote some great stuff. The Economic Consequences of the Peace (1919), an international bestseller, is a prescient protest against the statesmen’s blunders in the aftermath of World War I that made another world war too likely. A Tract on Monetary Reform (1923) is that rare thing, a book on economics that is a masterpiece of writing style. If I recall correctly, Robert Skidelsky’s biography of Keynes reports that Virginia Woolf admired its style. Even the second volume of the Treatise on Money (1930) remains worth reading for economists interested in central banking.

The third reason Keynes remains influential is that his most important book, The General Theory of Employment, Interest and Money (1936), is a muddle. In a noble quest to explain the Great Depression, Keynes was struggling to express thoughts that were beyond his grasp, and in some areas beyond the grasp of other economists at the time also. Parts of the book contain flashes of insight expressed in Keynes’s vivid style, using metaphors from nature or Biblical parables. Other parts are head-scratchingly obscure, and have given rise to a cottage industry, persisting to this day, of trying to determine what Keynes really meant. The book is worth reading and even rereading for economists, but in the end it does not cohere and it should be read with that in mind.

In the same year as The General Theory was published in London, so was Vera Smith’s book The Rationale of Central Banking. Keynes’s book was the effort of mature scholar. Smith’s book was her Ph.D. dissertation, supervised by Hayek, published when she was just 24. Smith’s book, which is about how central banking came to replace free banking in a number of countries, attracted little notice when it was published, but it has had a long afterlife, and it is still read today, though by a far smaller continuing readership than The General Theory.

To my knowledge, Keynes never discussed free banking. He was willing to think about all sorts of other ideas that at the time were unusual, but despite its historical record, free banking seems to have been almost unthinkable for him as a live possibility for monetary reform. It was to remain so among economists generally for several decades. Keynes was, however, willing to think about other non-central banking systems. He was the guiding spirit behind the currency board that existed in North Russia from 1918-1919.

We are not done with Keynes yet. Even though his collected writings published by the Royal Economic Society run to 30 volumes, some important unpublished material remains scattered in archives and elsewhere. Perhaps one day we will turn up a letter, a memorandum, or a speech showing that he did at some point ponder free banking.