The young Keynes was a monetarist

I am continuing my reporting on my survey of monetary thinkers’ book recommendations for students of monetary matters. The next “victim” is Scott Sumner and lets jump right into it. Here is Scott’s book list:

David Hume.  Essays on Economics

Irving Fisher. The Purchasing Power of Money

Keynes.  A Tract on Monetary Reform

Ralph Hawtrey.  The Gold Standard in Theory and Practice

Friedman and Schwartz. A Monetary History of the US

David Glasner.  Free Banking and Monetary Reform

Robert Barro.  Macroeconomics

I had asked for five book recommendations, but Scott gave me seven to choose between, but that doesn’t really matter the important thing is that we inspire people to read these books. Nonetheless Scott told me that if we had to cut it to five we should cut out Hume and Keynes. So my next step is not completely fair – I will focus on Keynes’ “A Tract on Monetary Reform”.

The reason is that Tract is a popular book among many of the monetary thinkers I have surveyed and it is not only Scott who has it on his list. The reason I find it interesting is that Tract is really a monetarist book rather than a Keynesian book. Keynesian here meaning the Keynes is The General Theory – Keynes’ most famous book.

To realise that Tract is very much a monetarist book just take a look at that preface. Here is a photo from my own copy of the book:


The point Keynes makes here is that in a free market without money the markets will tend to “clear” – supply and demand will match each other. This is basically a Walrasian world. However, once we introduce money there is a possibility that if get a disequilibrium between money supply and money demand this disequilibrium will spill-over into other markets or as Keynes express it:

“But they (other markets) cannot work properly if money, which they assume as a stable measuringrod, is undependable.”

In fact this is very much how Leland Yeager or Clark Warburton would explain macroeconomic disequilibrium – recession, deflation, inflation are results of monetary policy failure. It doesn’t get anymore monetarist than that.

Brad DeLong in an excellent review of Tract from 1996 went so far as to say that it was “the best monetarist economics book ever written”. I wouldn’t go so far as Brad, but I certainly agree that Tract fundamentally is monetarist and that is also is very good book. But it is not the best monetarist book ever written – far from it.

In general I would very much like to recommend Brad’s 1996 review of the Tract. It covers all five chapters of the book and  in my view gives a pretty good description of Keynes’ views from the period prior to he became an “Keynesian”.

Get the monetary framework right and let the market take care of the rest

The overall message in the Tract in my view is that Keynes wants to demonstrate that if you mess up the monetary system you will mess up the entire economy. But if on the other hand ensures a stable and predictable – rule based – monetary system then the free market will tend to work well and the price mechanism will more or less ensure an efficient allocation of economic ressources. This of course has been Scott Sumner’s message all along. The Federal Reserve should conduct monetary policy based on – a predictable rule NGDP level targeting – and then the free market will take care of the rest.

The Federal Reserve and other central banks since 2008 has messed up the monetary system and as a result they have done great economic damage. Keynes has a message to today’s central bankers (also from the preface):

“Nowhere do conservative notions consider themselves more in place than in currency; yet nowhere is the need for innovation more urgent. One is often warned that a scientific treatment of currency questions is impossible because the banking world is intellectually incapable of understanding its own problems. If this is true, the order of Society, which they stand for, will decay. But I do not believe it. What we have lacked is a clear analysis of the real facts, rather than ability to understand an analysis already given. If the new ideas, now developing in many quarters, are sound and right, I do not doubt that sooner or later they will prevail.”

I find Keynes’ words from 1923 extremely suiting for the crisis of central banking today and even more suiting for Scott Sumner’s endless campaign to enlighten central bankers and the general society about the importance of proper “Monetary Reform”. In that sense Scott Sumner follows in the footsteps of the younger Keynes, Gustav Cassel, Leland Yeager and Milton Friedman in advocating radical monetary reform.

And finally I should of course note that later in the year Scott’s great work on the Great Depression will be published. I am sure it will become a classic on its own. I have been so privileged to read a draft version of the book and I hope you all buy it when it is published. Scott tells me the title of the book will be  “The Midas Paradox: A New Look at the Great Depression and Economic Instability” 

PS I just have to share Brad Delong’s great comments about the young and the old Keynes:

“The implicit point of view is that if the value of money is dependable then leaving saving to the private investors and investment to business will work well. The magnitude of the Great Depression of the 1930s would destroy Keynes’s faith in the proposition that stable internal prices implied a well-functioning macroeconomy and small business cycles. But from our perspective today–in which the Great Depression is seen as a unique disaster brought on by an unprecedented collapse in financial intermediation and in world trade, rather than as the largest species of the genus of business cycles–it is far from clear that Keynes of 1936 is to be preferred to Keynes of 1924. Besides, Keynes of 1924 writes better: his prose is clearer, less academic, less formal; his argument is more straightforward, linear, easier to follow; his style is as witty.”

PPS It is Sumner in Skyrup…

Tract white wine

Leave a comment


  1. Keynes is the best monetary ecpnomist of any times

    • Miguel, that I certainly do not agree with and one could of course ask which Keynes you are thinking about – Tract-Keynes or GT-Keynes?

  2. Both. In a y case Friedman admired Keynes a lot.

  3. Alan Jaske

     /  July 8, 2013

    I would describe Friedman’s “admiration” more as a deep respect for the man. Whether or not his ideas are correct, I still regard Keynes as one of the greatest economic minds of the all-time, because he almost single-handedly changed how the world thought about economics.

    • Alan, I very much agree. There is no way around – Keynes was a great economist with some brillant views and Unfortunately also some very misguided views.

  4. John Hall

     /  July 8, 2013

    I was just adding some of those books to my amazon wish list. The Barro Macroeconomics book has apparently been split into two books in the latest editions. I could only find Hume Writings on Economics, which I presume covers similar essays as what you mentioned. Hawtrey’s book is out of print.

    • John, I am happy that this is inspiring to book shopping – Amazon should really be paying me;-)

      Unfortunately a number of monetary classics are out of print. Maybe we should start an effort to get some of these books republished.

  5. I use to think that mía guises Keynesianism was a creation of his followers

  6. “The point Keynes makes here is that in a free market without money the markets will tend to “clear” – supply and demand will match each other.”

    I really have a hard time understanding what this means. In absence of money, how is there really an economy? Have we ever had an example of such an economy?

  7. Brad DeLong

     /  July 14, 2013

    What do you think is a better monetarist book than the Tract?

    • Brad,

      Thanks for dropping by. One could of course think I would pick something by Friedman, but in fact my pick for the best monetarist book would probably be Leland Yeager’s “Fluttering Veil”.

      In terms of something that is very readable I would clearly choose Friedman’s “Monetary Mischief”, but that is of course a collection of articles and not a textbook style book. Come to think of it – we miss a textbook style monetarist book.

      I actually think that one of the most important things about a monetarist (textbook) book should be a description of the monetary transmission mechanism. The description of the is very good in Tract, but Yeager is even better. Friedman on the other hand had a bit of a problem explaining the monetary transmission mechanism. I think his problem was that he tried to explain things basically within a IS/LM style framework and that he was so focused on empirical work. One would have expected him to do that in “Milton Friedman’s Monetary Framework: A Debate with His Critics”, but I think he failed to do that. It is probably the worst of all of Friedman’s books.

      Finally I would also mention Clark Warburton’s “Depression, Inflation, and Monetary Policy; Selected Papers, 1945-1953”. Again a collection of articles, but it is very good and explains the monetary transmission mechanism very well. I believe Warburton was a much bigger inspiration on Friedman than he ever fully recognized – even though Warburton is mentioned in the Introduction in Monetary History.

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  5. ラルス・クリステンセン 「若かりし日のケインズはマネタリストだった!?」 — 経済学101
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  8. In the long run we are all DUMB – losinterest

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