Tract on Monetary Reform

by John Maynard Keynes

This treatise, written in 1923 by the renowned proponent of deficit spending, is devoted to the need for stable currency as the indispensable foundation to a healthy world economy. Keynes begins by laying out data showing the serious fluctuations in the value of money that began in 1914 and subjected North America, Europe, and India to injurious cycles of inflation and deflation. He describes the various effects on investors, business people, and wage earners of this erratic underlying influence and makes it clear that policies limiting such fluctuations must be implemented to ensure greater economic and social stability. He finds the gold standard, which was used as the basis of value for many currencies, including the U.S. dollar at that time, to be ultimately unreliable since gold itself is also prey to unstable valuations. In the final analysis he recommends the implementation of policies by Great Britain and the United States that aim at achieving stability of the commodity value of the dollar rather than the gold value. "[T]he ideal state of affairs," he argues, "is an intimate co-operation between the Federal Reserve Board and the Bank of England, as a result of which stability of prices and of exchange would be achieved at the same time."As always, Keynes proved to be amazingly The United States did eventually abandon the gold standard and the U.S. dollar is indeed the basis of currency values today. Keynes's brilliant, clear analysis of the world monetary situation at the beginning of the twentieth century, with his many suggestions and his masterful elucidation of economic principles, is still well worth reading today at the beginning of the twenty-first century.

Genres: Economics, Nonfiction, Politics, Classics, Finance, Philosophy, History

220 pages, Paperback

First published January 1, 1971

About the author

John Maynard Keynes, 1st Baron Keynes (CB, FBA), was an English economist particularly known for his influence in the theory and practice of modern macroeconomics.

Keynes married Russian ballerina Lydia Lopokova in 1925.

NB: Not to be confused with his father who also was an economist. See John Neville Keynes.

Reviews

[Frank Stein · Rating 5 out of 5]

For a seminal work from a radical economist, this book can seem surprisingly conservative. Basically, "The Tract on Monetary Reform" (1923) is Keynes's argument for a managed currency, one where the central bank controls the money supply in order to create a steady price level, instead of merely pegging a currency to gold. Today, this is an almost universal commonplace, but, as Keynes notes, just five years before his book was published, such a concept was all but unthinkable, except by a few economists. The dislocations of the First World War and the end of international stability, however, forced countries to manage their currencies by default. As Keynes says "A regulated non-metallic standard has slipped in unnoticed. It exists. While the economists dozed, the academic dream of a hundred years, doffing its cap and gown, clad in paper rages, has crept into he real world by means of the bad fairies - always more potent than the good - the wicked Ministers of Finance." More famously, he noted that "the gold standard is already a barbarous relic."

This book contains this and some of Keynes's other most noted turns of phrase, mainly on gold, which seemed to inspire his more poetic moments. On the fact that a clear amount of money (say in gold), though causing variable movements of prices in the short-run, tended to create stability in the long run, Keynes said "But this long run is a misleading guide to current affairs. In the long run we are all dead." In another part, he notes that the Treasury economist Ralph Hawtrey's plan to retain some gold as the backing for a managed currency comes from "the preference of Englishmen for shearing a monarch of his powers rather than his head."

This quote also brings out another constant in Keynes works shown again here, the fact that he is an unabashed English partisan. One reason Keynes wants a managed currency is because he worries that tying England to gold would be to "surrender our freedom of action to the Federal Reserve Board of the United States," which then held most of the world's free gold. Like in his "Economic Consequences of the Peace," keeping England free and powerful was always his cynosure.

Keynes admits that so far most countries had abused their new-found freedom to manage the currency, taxing people quietly through massive inflations of which he was horrified. He explicitly agrees with Lenin that there was no better way to corrupt capitalism than to "debauch the currency," since it turned entrepreneurs into speculators and profiteers with no moral compass for control (yet he also worried, in a few Pikketty-type moments, that the power of inheritance and compound interest required a little inflation or capital taxes now and then to prevent the passive rentier from dominating a country). Keynes seems to posit here that mere stable money will end most of the world's meliorable economic ills.

Milton Friedman once called the "Tract on Monetary Reform" Keynes's best work, and I can see why. It's the clearest, most well-reasoned defense of monetarism I've ever read. By the 1930s, however, Keynes thought it was largely wrong, and it was unfortunately forgotten. That's a shame.

[Matthew · Rating 3 out of 5]

Quite a difficult read -- not sure if its because of my weak grasp of economics or because of his language. Still, it was interesting to me to go back and read this work by Keynes. The way he argues and derives principles of foreign exchange is sharply different and much more organic that the mathematical presentation of exchange rate/inflation/interest rate relationships in contemporary textbooks.

Also interesting to note that Keynes wrote this as a publicly distributed pamphlet and not an academic text in the mid-1920's, and it became one of the hottest reads on the street -- the inflationary/deflationary changes has become such a big public issue that people could really feel for it and wanted to know what was happening.

[Juanoprivot · Rating 4 out of 5]

Un libro que sin duda me releeré, dado que hay apartados que me ha costado un poco entenderlos y me ha pillado en un mal momento para prestarle mucha atención (exámenes de cuatri :v)

Benjamin Anderson, un economista que me gusta mucho por unos pasajes que he leído de él, tiene un artículo donde responde a las tesis principales del libro de Keynes ("patrón oro contra moneda administrada").

Esta obra además destaca porque en ella se encuentra varias de sus frases más famosas, tales como "en el largo plazo todos estamos muertos" o "el patrón oro ya es una reliquia bárbara". Sus críticas a la teoría cuantitativa (haciendo uso de la ecuación de Cambridge) me han gustado mucho, y sobretodo como desarrolla el proceso por el cual un Estado se beneficia con la inflación hasta llegar a un punto en el que ya no es posible(hiperinflación)y se ven obligados a quebrar; donde la inflación se incrementa mucho más posiblemente por aumentos de la velocidad del dinero.

Me encantaría volver a leerme este libro para cuando vaya a retomar la teoría monetaria, muy recomendable

[Matt · Rating 4 out of 5]

Most great minds rode a thin line between the conventional and the decidedly unconventional, John Maynard Keynes no exception.

This work in applied monetary economics displays Keynes' early monetarist views (in sum: stabilize a nation's internal price level even if at the expense of maintaining a fixed exchange rate, e.g. to gold or to a foreign currency, and you stabilize the economy) together with a recognition of the political economy of monetary and exchange rate policies, particularly the interests of the rentier class.

While still a cautious advocate for a domestically managed currency as the primary means towards promoting growth and prosperity (one that, if it is to err, should lean towards modest inflation in the interests of entrepreneurs and workers), Keynes begins to point ahead towards one issue which he would dwell upon later during the depths of the Depression: the stubbornly slow process of adjustment which stymies monetary policy from smoothing out shocks to the economy, particularly when deflationary. As he would say in the Tract: "In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when a storm is past the ocean is flat again."

Similarly, under the Gold Standard (then dominated by the United States and the decisions of its central bank, the Federal Reserve), uncoordinated flows of bullion can drive unsustainable credit booms in countries where internal prices are unable to adjust quickly enough to counteract them, bringing painful busts and depressions. Likewise, having lashed themselves to the sails of the largest creditor nation of the time - the United States - smaller nations would be forced to follow suit in monetary policy even when domestic states of affairs dictate the opposite course of action.

Keynes' prose is lucid, at times witty with a hint of snark directed at his intellectual opponents. He expounds his ideas with only minimum recourse to a formal model (the Cambridge equation of exchange) and statistical tables, which was to be his style in later works. Aside from a working knowledge of basic economic concepts, the Tract is reasonably accessible to any interested student of economics or economic history.

Anyone interested in the full arc of Keynes' thought should read this relatively short text as one of the 'essentials' together with the more widely read General Theory, among others.

[Steven Richardson · Rating 4 out of 5]

This is the source of famous remarks by one of the most famous economists ever ("In the long run we're all dead" and gold is a "barbarous relic"). It's also the source of an axiomatic inflationary bias in monetary policy. The most interesting lesson in reading this book is the historical context of Britain and other major nations' challenges dealing with enormous debts to the US incurred in WWI. He noted that the dollar had already displaced gold as the global reserve currency and wrote this book to address the need for coordination by countries to manage their currencies (instead of blindly supporting gold prices).

The first two chapters offer a good explanation of currency depreciation (aka inflation) and Keynes acknowledges that it is effectively a tax that benefits bondholders. The third chapter is a rather dense discussion of currency exchanges. In the last two chapters, he delivers his policy advice to central banks (specifically the Bank of England and the very new Federal Reserve Board) to shift from a focus on stabilizing exchange rates (prominent under the gold standard) to focus on domestic price stability. While this was justified primarily by concerns about national economies, it was also an appeal to the US to help foreign debtor nations by increased lending (depreciating the dollar) instead of hoarding gold to protect its pre-war value.

[Tomas Daubner · Rating 4 out of 5]

It is noteworthy that 3 of the most important economists of the 20th century, namely Keynes, Hayek, and Friedman, all had a background in History and focused their early careers on the topic of money, they shared an interest in studying the historical evolution of monetary systems and their impact on economic growth and stability. It is no coincidence that their works on money continue to shape the way we think about macroeconomic policy and financial regulation today.