Keynes letter to President Roosevelt

17 Mar, 2015 at 17:33 | Posted in Economics | 5 Comments

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

John Maynard Keynes

[h/t Constance]


  1. While I’m basically a Keynsian, I’m not impressed by that passage. First, Keynes rather contradicts himself. He claims the quantity of money is irrelevant, but in the 2nd half of the 5th paragraph he says a way out of a recession is the “public authority” to spend “borrowed or printed money”.

    Well printing money DOES INCREASE the quantity of money! Moreover, that increase in the quantity of money is one way that that form of stimulus works, seems to me. Or is Keynes seriously suggesting that when peoples’ stock of money rises (e.g. when they win a lottery) there is no effect on their spending?

    Of course I’m extrapolating from micro to macro there which is always dangerous, but research has been done in the US as to household’s reaction to tax cuts or tax rebates, and (amazing as this may seem) when households get a tax rebate, their weekly spending rises.

    • “Or is Keynes seriously suggesting that when peoples’ stock of money rises (e.g. when they win a lottery) there is no effect on their spending?” This is flawed logic. Article says you should focus on INCOME/expenditures and NOT (too much) on stocks. It’s their income which rises so they are able spend more.

      Their money-stock only rises if they SAVE parts of their income.

    • The way I read the passage, Keynes is not being inconsistent. If the way out of a recession is to spend money, that typically increases the money supply, but the point is the spending. If you just print more money but do not spend it or lend it, that is not enough. (If people think that you intend to spend the new money, that may have an effect, but that is iffy.)

  2. Thewisemansfear,

    There’s an important distinction to be made here between commercial bank created money and central bank created money (so called “base money”). The stock of the latter the private sector has is not determined by how much “saving” it does. If the state decides to create and spend such money into the private sector, there is no way the private sector can get rid of that money unless the state decides to reduce the private sector’s stock of the stuff (e.g. via increased tax). If one household or firm spends such money, it just ends up in the pocket of another household or firm.

    In contrast, for each dollar of commercial bank created money there is a dollar of private debt. Thus such money is not a net asset for the private sector, thus it would very strange to argue that increasing the private sector’s stock of that money induced the private sector to spend more. And it’s because of that point that many (myself included) regard the size of that stock of money as being a RESULT of the private sector’s desire to do business, not a cause.

    Plus Keynes refers to the “public authority” as being the creator of the type of money he has in mind, so that’s pretty obviously base money.


    You say “If you just print more money but do not spend it or lend it, that is not enough.” Obviously if a central bank prints billions of dollars and stores them in its vaults, that has no effect. (David Hume made very much that point 200 years ago).

    However, I assume Keynes is not making that statement of the obvious in the above passage. That is, I assume he is suggesting that the stock of money in PRIVATE hands has no effect. That’s what I was objecting to. I.e. I suggest that when people win a lottery (surprise surprise) their weekly spending rises.

    • Thanks, Ralph. 🙂

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