Tracking down the original source for this statement is tricky, but the earliest I can find is a treatise called Bulletin of the Commission to Study the Organization of Peace (Commission to Study the Organization of Peace, New York, 1941). I assume that Keynes wrote it (anyone who knows better please correct me).
It reads as follows:
“In short, the analogy with a national banking system is complete. No depositor in a local bank suffers because the balances, which he leaves idle, are employed to finance the business of someone else. Just as the development of national banking systems served to offset a deflationary pressure which would have prevented otherwise the development of modern industry, so by extending the same principle into the international field we may hope to offset the contractionist pressure which might otherwise overwhelm in social disorder and disappointment the good hopes of our modern world. The substitution of a credit mechanism in place of hoarding would have repeated in the international field the same miracle, already performed in the domestic field, of turning a stone into bread.” (Bulletin of the Commission to Study the Organization of Peace, p. 24).The phrase is obviously a piece of rhetoric, not meant to be taken seriously. No, it doesn’t mean that “credit expansion is the same thing as creating wealth.”
In fact, the phrase - properly understood - does not even refer to Keynesian stimulus at all: it refers to the ability of private fractional reserve capitalist banks to turn hoarded money (what we would now call money held as reserves) into credit for investment purposes (see Skidelsky 2000: 247). This is the miracle of stones into bread.
A private banking system that causes credit expansion by using idle money allowing loans for capital goods investment raises output and employment, and that latter process produces more wealth for the community. Credit is a means (or medium) by which these things are facilitated.
Moreover, Keynesian stimulus is about getting the private sector to create wealth by increasing capacity utilization and using idle resources (including labour) by increasing aggregate demand through expansionary fiscal policy, just as private investment, bank credit, and payment of wages to workers by a business can create the private spending that does the same thing.
Denying that is like denying that the sky is blue on a clear day.
BIBLIOGRAPHY
Bulletin of the Commission to Study the Organization of Peace, Commission to Study the Organization of Peace, New York, 1941.
Skidelsky, R. J. A. 2000. John Maynard Keynes: Fighting for Britain 1937–1946 (vol. 3), Macmillan, London.
Credit is a means (or medium) by which these things are facilitated.
ReplyDeleteCredit is a means, credit expansion is not a means.
Credit that is financed by real savings is real capital. Production was carried out, money was earned, then it was saved and lent. This brings about more production because the loans are backed by real savings in the production process.
Credit expansion only redistributes existing wealth, and raises prices of some things (typically capital goods and durable consumer goods) before other things (typically perishable consumer goods).
Moreover, Keynesian stimulus is about getting the private sector to create wealth by increasing capacity utilization and using idle resources (including labour) by increasing aggregate demand
Wealth can only be created via utilization of CORRECT resource allocations, and CORRECT labor allocations. Not just ANY resource allocation and not just any labor. An economy with 100% resource utilization and 100% employment can still be far less productive than an economy with 90% resource utilization and 91% employment, if the resource and labor allocations in the fully utilized economy are NOT IN LINE WITH REAL CONSUMER PREFERENCES and the productivity of labor is lower.
Just because a resource is idle, that doesn't mean it should be used in production the way it was originally planned but then delayed or rejected. In many cases, (all of which can only be found through the market process), resources should be liquidated because the consumers don't value that resource the way it was originally planned, and prefer something else instead.
The government can't know what the consumers really value, unless they passively observe the producers and consumers getting together and see just what the consumers value when it comes to that resource.
just as private investment, bank credit, and payment of wages to workers by a business can create the private spending that does the same thing.
Not if it's financed by credit expansion.
Denying that is like denying that the sky is blue on a clear day.
"Credit expansion only redistributes existing wealth, and raises prices of some things (typically capital goods and durable consumer goods) before other things (typically perishable consumer goods)."
ReplyDeleteFalse. In the presense of idle resources or commodities that are relatively abundant, credit expanion will allow their use in investment.
Your comment is based on the absurd view that no resources are ever idle, that resources aren't available by international trade.
If businesses, unemployed labourers or foreigners engaged in trade freely accepted credit money/government money, it is none of your business, you vicious hater of freedom you.
I find it interesting that Mises in that article is just as upset about Silvio Gesell as he is about Keynes. LK, do you have any thought regarding the viability and/or desirability of Gesell's proposals?
ReplyDelete-Will