Following on from my last piece on the money cranks I thought it might be worthwhile to explore this theme in a little more detail. First we will look in more detail at Keynes’ relationship toward certain money cranks. And then we will look at some of these money cranks in a bit more detail in a separate post.
I recently came across a poorly written and poorly reasoned piece by ‘economist’ Gary North on Keynes’ relationship to the money cranks. First a note or two on North. North is an arch-crank of the Christian fundamentalist variety. Back in the late-90s North was telling everyone that the world was going to come to an end due to the Y2K bug (it appears that North considers himself not just an economist but also a computer expert!) and that Fundamentalist Christians would have to reconstruct the world from scratch.
Thankfully North’s cranky delusions never came to pass because his views on Christianity include advocacy of the death penalty for women who lie about their virginity, children who curse their parents, blasphemers and, of course, male homosexuals. If this doesn’t sound like the sort of “love thy neighbour” and “forgiveness in the eyes of Christ” Christianity which is expounded by the mainstream churches that many of us grew up in it’s because it’s not: this is the lunatic fringe of Christianity; in fact, it’s even the lunatic fringe of the already fairly nutty fundamentalist movement in the US. North also has a close relationship with various conspiracy theories, as he himself admits when he writes in relation to his fringe views on whether the government was involved in 9/11,
I have faced this all of my adult life. I started out in 1958 with a high school term paper on whether Roosevelt knew an attack on Pearl Harbor was coming. I concluded that he knew an attack somewhere in the Pacific was coming. I have not changed my mind. In 1972, when I was awarded my Ph.D. in American history, as far as I knew, I was the only historian age 30 or younger with a Ph.D. in history who believed this.
Anyway, North tells us that Keynes took his ideas in the General Theory from the money cranks Silvio Gesell and C.H. Douglas. North claims that “Keynes’ disciples, deservedly embarrassed by this inconvenient fact, have done their best to conceal it for 70 years”. Of course, many Keynesians — myself included in my original piece — have noted the connection many times. A quick Google search gives us a number of academic sources to choose from in this respect — here is one entitled Keynes’ Political Philosophy: The Gesell Connection, for example.
Noting a link between the ideas is, of course, very different from saying that the source of Keynes’ ideas were the money cranks. This is what North claims. From an academic perspective, this is a very strong claim indeed and would require fairly extensive documentary evidence — letters from Keynes, comments from his close associates and so on. Of course, North provides none of this and instead simply asserts that because the ideas bear some passing resemblance Keynes must have lifted them from the cranks.
North also claims that the prominent monetary economist Irving Fisher is a crank. He also claims that Milton Friedman is a money crank. North’s criteria for being a crank is basically that you don’t agree with Gary North. This is, of course, highly ironic because North is one of the least mainstream people you could possibly come across in his views on just about everything. But that doesn’t matter. The three most prominent monetary economists of the 20th century are cranks and North is not. One could reach for the psychological manual at this point, but I think the intelligent reader will have already recognised what is going on here.
Anyway, what about the question of the influence of the money cranks on Keynes? Well, the evidence we have shows that Keynes recognised that Gesell and Douglas had valid insights but he wholly disagreed with their formulations. He seems to have thought that C.H. Douglas had recognised a fundamental problem of our economic system — not under-consumption, as North insists, but rather a shortfall of aggregate demand (which usually is caused by a shortfall in investment not consumption which is a stable function in basic Keynesian theory) — but he nevertheless thought that Douglas’ theories were pretty crankish and unclear. Keynes wrote,
On the other hand, the detail of his diagnosis, in particular the so-called A + B theorem, includes much mere mystification. If Major Douglas had limited his B-items to the financial provisions made by entrepreneurs to which no current expenditure on replacements and renewals corresponds, he would be nearer the truth. But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions as well as by increased expenditure on consumption. Major Douglas is entitled to claim, as against some of his orthodox adversaries, that he at least has not been wholly oblivious of the outstanding problem of our economic system.
Clearly Keynes was not taking his cue from Douglas here. Instead he is recognising that Douglas was “not wholly oblivious” of the problem facing the capitalist economic system during a period of depression.
Before we move on it should be worth noting, however, one prominent Keynesian economist who was definitely inspired by Douglas. James Meade stated explicitly that prior to discovering, first, Fisher’s quantity theory of money theorem and later Keynes’ savings and investment theorem he was inspired by Douglas. In his Nobel Prize lecture he said,
My interest in economics had the following roots. Like many of my generation I considered the heavy unemployment in the United Kingdom in the inter-war period as both stupid and wicked. Moreover, I knew the cure for this evil, because I had become a disciple of the monetary crank, Major C.H. Douglas, to whose works I had been introduced by a much loved but somewhat eccentric maiden aunt. But my shift to the serious study of economics gradually weakened my belief in Major Douglas’s A+B theorem, which was replaced in my thought by the expression MV = PT. At Cambridge I made a close friendship with Richard Kahn and became a member of the ‘Circus’ with him, Piero Sraffa and Joan and Austin Robinson, which discussed Keynes’ Treatise on Money and stimulated the start of its translation into the General Theory. Keynes appeared at the weekends when Richard Kahn reported to him our discussions of the week and when we met on Monday evenings at the Political Economy Club in Keynes’ rooms in King’s College. Thus I abandoned the formula MV = PT for I = S.
Given that Meade stated all this in his Nobel Prize lecture really doesn’t support North’s dubious idea that any influence the money cranks did have on the Keynesian revolution was swept under the rug, of course! But people who lean toward conspiracy theories and the like are apt to think that something is always being covered up and so forth.
So, what about Gesell’s influence on Keynes? Keynes actually discusses this at some length in the General Theory. He says that “in the post-war years his devotees bombarded me with copies of his works; yet, owing to certain palpable defects in the argument, I entirely failed to discover their merit.” So it is clear that when Keynes was writing his Treatise on Money he was not under the influence of Gesell. Indeed, for people familiar with this work this should be rather obvious.
Keynes’ early work on monetary theory was influenced primarily by Knut Wicksell, as has been noted many times. Keynes used Wicksell’s distinction between the ‘bank rate of interest’ and the ‘natural rate of interest’ to argue that the central bank should manipulate the bank rate in order to generate full employment. Already implicit in this is the idea that the economy may not ‘naturally’ adjust to full employment. So, in his early work — which he explicitly states was not influenced by Gesell — there is the kernel of the idea that there might be a deficiency of aggregate demand due to a shortfall of investment which is due to the bank rate of interest being too high relative to the natural rate.
And what about when Keynes began to think about this in terms of savings, investment and deficiencies of aggregate demand? Again, we have written evidence that this was not due to Gesell. The key component of the Keynesian theory is that of liquidity preference and Keynes explicitly writes,
[Gesell] fails to explain why the money-rate of interest is not governed (as the classical school maintains) by the standard set by the yield on productive capital. This is because the notion of liquidity-preference had escaped him. He has constructed only half a theory of the rate of interest.
Clearly Keynes thought that the key to whole argument was the liquidity preference theory and Gesell had not formulated it. Thus, the notion that the Keynesian revolution grew organically out of the work of the money cranks is quite simply wrong. That is, unless North can unearth some documentation showing that Keynes was telling lies in the General Theory and all his inspiration had actually come from the cranks rather than Wicksell and his own ingenuity.
At the end of his piece North recommends that the reader consult the work of two actual money cranks. Namely, Henry Hazlitt and Murray Rothbard. Of course, by the criteria laid out in the last piece both of these authors are money cranks and so too is North himself. My definition there involved whether an author could fall into one of two categories. These are:
1. a money crank is a person who views the money system from a position in which they have substantial emotional investment.
2. a person who believe that all, or the vast majority of, social ills are caused by the current money system and thus can be solved by implementing an imaginary money system that they have designed can be safely considered a money crank.
The advantage of this definition is that we cannot simply label people that we disagree with as cranks. Thus, while I agree with some aspects of what Gesell and Douglas were saying — as did Keynes — they are nevertheless cranks by my definition. So too are Rothbard, Hazlitt and North. That North displays other cranky attitudes — such as his Y2K prophecies and insistence that the US government is covering up something about 9/11 — is not surprising as cranks often hold multiple cranky beliefs simultaneously. This is a phenomenon known in the literature as ‘crank magnetism‘.
North will, of course, insist that I am the crank. This is because anyone who disagrees with him is a crank. In his mind I am a crank. So is Fisher, Keynes, Friedman and most people working at central banks. Frankly, I’m happy to be in such good company and if North does insist on throwing me in what he thinks to be the crank-basket I will be more than pleased. In the meantime I imagine that he will continue peddling half-baked Austrian economics and conspiracy theories.