Choice in Currency

Lord Keynes has always appeared to me a kind of new John Law. Like Law, Keynes was a financial genius who made some real contributions to the theory of money. (Apart from an interesting and original discussion of the factors determining the value of money, Law gave the first satisfactory account of the cumulative growth of acceptability once a commodity was widely used as a medium of exchange.) But Keynes could never free himself from the popular false belief that, as Law expressed it, ‘as the additional money will give work to people who were idle and enabled those already working to earn more, the output will increase and industry will prosper’.13

It was against this sort of view that Richard Cantillon and David Hume began the development of modern monetary theory. Hume in particular put the central point at issue by saying that, in the process of inflation, ‘it is only in this interval or intermediate situation between the acquisition of money and the rise of prices, that the increasing quantity of gold and silver is favourable to industry’.14 It is this work we shall have to do again after the Keynesian flood.

In one sense, however, it would be somewhat unfair to blame Lord Keynes too much for the developments after his death. I am certain he would have been—whatever he had said earlier—a leader in the fight against the present inflation. But developments, at least in Britain, were also mainly determined by the version of Keynesianism published under the name of Lord Beveridge for which (since he himself understood no economics whatever) his scientific advisers must bear the responsibility.

I have been blamed for charging Lord Keynes with a somewhat limited knowledge of economic theory, but the defectiveness of his views on the theory of international trade, for example, have often been pointed out. And the clearest proof seems to me to be the caricature of other theories which he presented, presumably in good faith, in order to refute them.

F.A.H.

• 13John Law, Money and Trade Considered with a Proposal for Supplying the Nations with Money, W. Lewis, London, 1705. [A Collection of Scarce and Valuable Tracts (the Somers Collection of Tracts, Vol. XIII), John Murray, London, 1815, includes John Law’s tract (1720 edition) at pp. 775–817; an extract from p. 812 reads: ‘But as this addtion to the money will employ the people that are now idle, and those now employed to more advantage, so the product will be increased, and manufacture advanced.’ -ED.]
• 14David Hume, On Money (Essay III).