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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.


  1. “For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, non economists”. – After Keynesian Economics aka After the Phillips Curve: Persistence of High Inflation and High Unemployment, page 57, Lucas and Sargent.

    “Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”

    Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country”. – Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.

  2. (I have disallowed a link submitted by this poster because it is an ad hominem attack on Keynes that is no help in thinking about his economics. There is much to disagree with in Keynes, but if you hate him rather than disagree with him or dislike certain aspects of his ideas and character, you lack historical understanding and imagination.)

  3. The best recent book on J.M. Keynes is "Where Keynes Went Wrong" by Hunter Lewis.

    Rather than just rant on about why I think Keynes was a waste-of-space as an economist, I would just encourage everyone to read this book.

    If you prefer older works – then those of W.H. Hutt and Henry Hazlitt are the ones to look for.

    F.A. Hayek did not like giving a blunt view of Keynes (they had been friends), but in "New Studies" (1978) he does state that Keynes never even really understood the economics of Alfred Marshall (the main Cambridge economist of the time of Keynes), let alone the Austrian School.

    In short, that Keynes was not really a first rank economist at all. What he was was first rate political propagandist and politician (including an academic politician).

    As for the Keynesian take over of academia.

    W.H. Hutt was asked how the Keynesians "won the debate" his reply is informative.

    There was no debate – the Keynesians were not interested in debate, they just took over the appointment of staff and the setting and marking of examinations and "that was that".

    It was classic "office politics" in the universities – and the rise of a POLITICALLY USEFULL doctrine (of use to politicians because it justified what they wanted to do anyway – spend lots of money). Not an "intellectual" revolution.

    It one reads and listens to leading Keynesians today (such as Paul Krugman) their utter ignorance of the Austrian School is obvious.

    They have not examined a school of thought and rejected it because their reasoning has shown them that it is mistaken.

    They have rejected free market economics (economic law) because it runs against their POLITICAL IDEOLOGY.

    It was the same with Keynes himself.

    His primary interests were ethical (moral philosophy – although of a very strange kind) and political – his "economics" was just window dressing for this.

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