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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.


  1. ", the only book on monetary theory I know of in English that has high merit both as economics and literature."

    You should read Washington Irving's essay "The Mississippi Bubble" about John Law and France in the 1720's. Written in 1820, Irving offers brilliant monetary theory in beautifully written prose.

  2. Federal issues of paper money during the Civil War weren't a 'new' power. I'm sure you know this, but the American Revolution itself was significantly financed by paper money. The reason the Civil War issues are exceptional is because they broke a shibboleth against publicly issued paper money that had arisen surrounding the experience of the Revolution and the post-Revolutionary period. It's a rarely acknowledged fact but the US Constitution hadn't just strengthened the Federal government. It had also taken away a few powers that the old federal government had enjoyed that people had decided it couldn't be trusted with, including the issue of paper money(this wasn't a universal feeling, but widespread enough to be enshrined in the new Constitution).

    I'm not personally too much against public issues of paper money to finance extraordinary wartime expenditures. Inflation is a fairly equitable form of taxation on wealth. I've read a few similar opinions from around the early post-Revolutionary period, shared by some of my home-town Philadelphians of the era.

    Early financial and banking history in the US is positively fascinating. It is, I think, an area that the Modern Free Banking School could afford to concentrate more on. The way that banking was originally enclosed into an exclusive power of legislatively chartered corporations is something I know a little about but something I could always learn more of. Not being a scholar, my access to resources on the subject is, unfortunately, limited. Besides the personal interest I have, studying early, pre-'free banking' era banking in New England could be incredibly valuable because, in many ways, the situation there and then was more 'free banking' than the subsequent period. New England legislatures were much more liberal with their granting of charters than other states, to the point where the situation almost approximated free entry, and the chartered banks of the period were FAR less regulated than those of the bond-substitution, unit banks of the 'free banking' era.

    New England was also, coincidentally, the most economically dynamic, developed region of the US in this period.

      1. Better to say: Inflation is a stochastic form of taxation on wealth. It doesn't specifically target any one person or group, it hits everyone to varying to degrees at random. In a system of public finance where dollars were simply printed in order to directly pay for the goods and services the state needs in wartime, the only real 'targeted' beneficiaries would be the providers of those goods and services. Past that it would wash out, with benefits not accruing to anyone in particular, and thus everyone being 'taxed' to more or less similar degrees.

        I don't see the problem.

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