Money in a Free Society: Keynes, Friedman, and the New Crisis in Capitalism
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Money in a Free Society contains 18 provocative essays on these questions from Tim Congdon, an influential economic adviser to the Thatcher government in the UK and one of the world’s leading monetary commentators. Congdon argues that academic economists and policy-makers have betrayed the intellectual legacy of both Keynes and Friedman.
These two great economists believed – if in somewhat different ways – in the need for steady growth in the quantity of money. But Keynes has been misunderstood as advocating big rises in public spending and large budget deficits as the only way to defeat recession. That has led under President Obama to an unsustainable explosion in American public debt. Meanwhile the Fed has ignored extreme volatility in the rate of money growth, contrary to the central message of Friedman’s analytical work. In his 1923 Tract on Monetary Reform Keynes said, “The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one.” In Money in a Free Society Congdon calls for a return to stable money growth and sound public finances, and argues that these remain the best answers to the problems facing modern capitalism.
well as half-baked. Nevertheless, as Keynes would have expected, it had unfortunate consequences. Because M0 is an indicator rather than a cause of inﬂation, it failed abjectly to give advance warning of future inﬂationary trouble. The role of two self-styled “monetarist” advisers to the government, Sir Alan Walters and Patrick Minford, in this failure needs to be mentioned. In the early 1980 s they were both critical of the importance attached to credit and broad money, and advocated that narrow
and early 2003 concern was expressed that even the United States could face the same dilemma. The Fed funds rate had fallen from over 6 percent in late 2000 to 1 ¼ percent two years later in response to a mild recession. But by mid-2003 the American economy had not achieved a convincing return to above-trend growth and seemed no longer to be responsive to cheap money. In remarks to the National Economists Club in Washington on November 21 , 2002 , Professor Ben Bernanke of Princeton, then a
However, this was not always so. During the Second World War, banks were obliged to lend almost exclusively to government. In the immediate post-war decade, claims on government constituted over two-thirds of banks’ assets in the U.K. and many other nations. In order to keep matters simple, it is assumed in the ﬁgures below that banks have no claims on the non-bank private sector. Banks therefore have only two kinds of assets: their cash reserves, which have already been discussed, and claims on
varied mostly in response to the vicissitudes of the exchange rate. But monetary policy was not thought to have a major part to play in inﬂuencing demand. Because it was assigned to the task of stabilizing foreign-exchange sentiment E s s ay 5 towards the pound, ﬁscal policy could instead be used for the vital aim of managing the domestic economy and trying to secure, on average, a high level of employment. The 1941 and other wartime Budgets had set a precedent for the use of ﬁscal policy in
like Old Keynesianism – dispensed with the quantity of money as an analytical category. Since three-equation New Keynesianism seemed to be working well for most of the Great Moderation, economists patted themselves on the back that they had a small and successful model of “how the economy works.” Moreover, this model’s omission of money and commercial banking had a professional advantage. It meant that economists – including economists in central banks – did not have to Introduction waste time