Further notes on Keynes, monetary policy and Debt Management.

Monetizing part of the debt which I began writing about in 1983 as a strategy to make Keynesian stimulus more effective is as I have often pointed out something which Keynes himself advocated as early as 1933. In a letter to newly elected President Franklin Roosevelt, Keynes makes it clear that he understood the concept and in certain circumstances advocated its use.Writing of the best approach to take to get out of a slump he writes “Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.

Later in the General Theory he reiterates this point that the method of financing can vary. Dudley Dillard later coined the term income creating finance as an alternative and more positive term for deficit financed spending.(See D.Dillard The Economics of John Maynard Keynes,NYC:Prentice Hall 1948 p.109 In Keynes’s preliminary draft of what later became his General Theory but at the time in 1932 what he called The Parameters of a Monetary Economy, Volume xiii Collected Works The General Theory and After Part 1, Preparation. p.405 Keynes wrote “The task of the monetary authority is to adjust to the best of its ability the quantity of money to changes in other parameters, so as to maintain as nearly as possible, an optimum level of output. we shall see..that the optimum level of output depends on the maintenance of an optimum level of investment , so that we can re-express the task of the monetary authority as being to maintain a rate of interest which leads to an optimum level of investment” So as early as 1932 Keynes was well aware of the importance using to the full monetary policy.

Dillard in his 1948 work The Economics of John Maynard Keynes discusses the various methods of loan finance from issuing bonds and selling them to private savers to selling them to the banks to having the Treasury issue non interest bearing notes to the Federal reserve banks “with instructions to increase the government deposit to the extent of the value of the notes. The government could then spend its balances in the usual fashion for public works and other expenditures.To ensure there is no danger of inflation from this strategy Dillard explains it should only be used when the economy is in a slump and output far below its potential and unemployment elevated.” (p114)

But he also points out that if inflation were to result it is not because of the method of financing but because of inappropriate and excessive monetary expansion. Dillard also makes the important point that when you are operating the economy at elevated unemployment rates and well below your potential output the cost of increasing output is essentially minimal. He states the case as follows.

” Obviously , it is not very convincing to tell an unemployed (person) that society cannot afford to burden (their) future by building them a house in which to live even though (they and their) fellow workers are doing nothing with their time and skill. The staunch advocates of annually balanced budgets are perhaps so accustomed to thinking in terms of the financial principles appropriate to an economy of full employment that they do not see the implications for public finance of an economy with widespread unemployment. When there is full employment, the real cost of hiring a (person) is what they produced in the job they give up in order to accept a new position.When there is unemployment the real cost of hiring an unemployed person is nothing, because nothing is sacrificed by the employment of their labour.This fundamental principle is not altered when money is brought into the picture in order to finance the employment “(Dillard, p.105)

These ideas and insights should not be forgotten in the debates to come over deficits, debt management, monetary and fiscal policy and the restoration of lower unemployment.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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