is the label I’m using here for what is actually the modern representation
of Mercantilism. Mercantilism was conventional economic thinking in Britain
in the 1600-1750 period before being swept aside by
the great Classical economists. Virtually all mainstream academic economists
today are Keynesians/neo-Mercantilists by this measure, although they
probably would not label themselves such. Part of the career strategy of most
any academic today is to apply a veneer of novelty or innovation to what are
in fact ancient ideas.
In the 1930s, the failure of the economists of the time to adequately analyze
and remedy the Great Depression – indeed, they were a major cause of
the Great Depression due to their fondness for “austerity”
including immense tax hikes – caused the political pendulum to swing
back toward the Mercantilist pole, where it has remained ever since.
The Keynesians are very fond of hypercomplication,
but in the end, their policy prescriptions typically don’t amount to
much more than government deficit spending spending
and some form of “easy money” policy. I say that this “easy
money” policy is basically just a policy of currency devaluation.
Now, here’s a funny thing: the Keynesians themselves very rarely
promote outright currency devaluation, at least for their home countries.
They are less shy about smaller foreign countries – like Greece today,
which all the Keynesians say needs its own currency which can be conveniently
devalued. In the 1980s or 1990s, the IMF was always busy recommending
currency devaluation to smaller countries around the world, with the usual
This pattern also goes back to the 1930s. During the 1931-1933 period, most of the major countries of the world devalued
their currencies. (France was the laggard, devaluing in 1936.) These were not
conducted by central banks as part of any sort of “easy money”
policy, involving interest rate targets, “quantitative easing,”
“Operation Twist,” “Long Term Refinancing
Operations,” “central bank swap agreements,” “acting
as a lender of last resort,” “nominal GDP targeting,” or
any other silly ad-hoc rationale for printing too much money. They were done
essentially (especially in the U.S. case) as outright policy decisions of the
This proved to be unpopular. Already by 1934, governments were getting tired
of “beggar thy neighbor” currency devaluations, and agreed to
cease any further steps in that direction. They quietly settled back into a
worldwide gold standard system, which was formalized in 1944 as the Bretton
Thus, when Keynes’ book The General Theory of Employment, Interest and
Money was published in 1936, the political tide had already moved away from
an explicit policy of currency devaluation. I often think of the book not so
much as a how-to guide for policymakers – it is far too incomprehensible
for that – but rather as a guide for career economists to make a living
in the new political environment. Remember, mainstream economists looked
pretty bad at that point, and you didn’t want to lose your economist
job because it was the middle of the Great Depression.
Thus, led by Keynes’ example, the new Keynesian economists adopted a
strategy of hypercomplication involving a lot of
abstruse mathematics, and a dizzying array of various “easy
money” rationales – without ever mentioning the now-unpopular
“currency devaluation” – to give politicians what they
wanted. What politicians wanted was by then established by the precedent of
the past five years or so: an excuse for big government deficit spending, and
some quick and dirty way to slap the economy into good enough shape in the
short-term to get re-elected, like an “easy money” policy.
“Currency devaluation” is pretty easy to understand, and already
politicians had proven capable of doing it without the assistance of academic
economists. The hypercomplication gave economists a
rationale to maintain their treasured sinecures as high priests of economic
gobbledygook, which was fine by the politicians as long as they came up with
the desired conclusions.
Usually the “easy money” arguments of today’s
neo-Mercantilists revolve around some interpretation of “lower interest
rates,” as a way to ultimately resolve unemployment, as explained by
the title of Keynes’ book. The funny thing about this is, the existing gold standard system had always provided rock-bottom
interest rates. From 1825 to 1914, a period of 90 years, the average yield of
the British Consol bond was 3.14%! This was a
government bond of infinite maturity, comparable to today’s 30 Year
U.S. Treasury bond.
Wasn’t that low enough? It was low enough.
The average yield of the U.S. long-term (20-30 year) government bond was
3.46% in September 1929 and declined steadily to 2.01% in December 1940.
Except for the devaluation of 1933, this was all with the gold standard,
without any overt “easy money” policy from the Fed.
From 1934 to 1940, the average yield of the 3-month Treasury bill was 0.15%.
Certainly no problem with high interest rates there.
Even today, with the Federal Reserve undertaking a barrage of unprecedented
steps to “lower interest rates” in the Keynesian fashion, the
yield of the 30-year Treasury bond is 3.19%. Is that the best you can do? By
gold standard metrics, that kinda stinks. Britain
did better than that, for ninety years straight, until being distracted by
World War I. This with a bond not of 30 year maturity, but infinite maturity!
Hey Ben Bernanke, how long can you tread water?
Any bond investor will tell you that, assuming a currency of stable value
such as is provided by a gold standard system, yields on high-quality debt
will tend to decline in a recession. Thus, declining interest rates is a
natural feature of a capitalist economy with a gold standard system in a
recession, and doesn’t need to be artificially manufactured by some
“easy money” policy. The only purpose of these various
“easy money” techniques is to induce a decline in currency value.
“Inducing a decline in currency value” is a euphemistic way of
saying “currency devaluation.” All of the Keynesian funny-money
tricks – notably the artificial decline in unemployment that Keynes
aimed for – don’t work unless the currency declines in value. How
would they? The gold standard system already provided very low interest
However, instead of a bald-faced act of official policy, where everyone knows
exactly who is responsible, you could blame the resulting currency decline on
“speculators” or the “free market,” or whatever else
happens to be politically expedient that day.
That’s why I say that, when you get past the smokescreen of bluster,
rationalization, and silly math, Keynesian “easy money” is
nothing but currency devaluation.
originally appeared at http://www.newworldeconomics.com/archives/2012/041212.html
on April 16, 2012.)