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Keynes and money during wartime

In my previous post I mentioned that my admiration for Keynes overall is quite strong. It is based on his deeds as a practioner of economic policy as well as his words as a theorist. Among his major writings on monetary economics, Indian Currency and Finance is now very little read because it concerns controversies long past. A Tract on Monetary Reform is, along with Dennis Robertson’s little primer Money, the only book on monetary theory I know of in English that has high merit both as economics and literature. The second volume of the Treatise on Money remains worthwhile for specialists in central banking. The General Theory of Employment, Interest and Money is, as I have previously mentioned, a muddle.

Keynes was deeply involved in running Britain’s war finances during World War I and World War II. Despite great strains, Britain avoided the postwar high inflations, maxi-devaluations, and currency confiscations that the other European belligerents suffered. The wars weakened the pound sterling but did not destroy it and the property relations that rested upon it. Keynes deserves some of the credit, especially as concerns World War II, in which his pamphlet “How to Pay for the War” influenced British policy.

That brings me to my theme. In monetary theory and even in most systematic treatments of monetary policy, the influence of war receives little or no attention. There have been many specialized studies of wartime monetary conditions, but look at a treatise or a textbook on monetary economics and you will not find war and its problems woven into the story even though war has been the source of many major changes to monetary systems.

War is particularly a problem for free banking. Governments’ desire to finance war through inflation and measures of “financial repression” such as exchange controls and forced saving (or confiscation of savings) are fundamentally at odds with the spirit of voluntary cooperation underlying free banking and the market economy more broadly. An important question for research in free banking is whether and how a free banking system that has been in effect nationalized during wartime can be privatized again in peacetime. War has often had a ratchet effect on government involvement in the financial system. In the United States, for instance, the federal government issued notes (paper money) during the Civil War and has continued to do so ever since. It is not enough to say, as Leonard Read did about wage and price controls, that “I’d Push the Button” if there were one to abolish them immediately. Many countries have rapidly decontrolled wages and prices. I am unaware of any country that has switched from government control of the monetary system to free banking with similar speed and energy. Switches have happened, but they have been matters of years rather than days.