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Economic Error #5: Keynes Was Correct About Money

Gary North
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Ellen Brown is a Keynesian. She is quite open about this. Her book is a defense of Keynesian economics.

First, she creates a straw man, the defense of the gold standard, which she hates.

The Quantity Theory of Money

The gold standard and the inflation argument that was used to justify it were based on the classical "quantity theory of money." The foundation of classical monetary theory, it held that inflation is caused by "too much money chasing too few goods." When "demand" (the money available to buy goods) increases faster than "supply" (goods and services), prices are forced up. If the government were allowed to simply issue all the Greenback dollars it needed, the money supply would increase faster than goods and services, and price inflation would result. If paper money were tied to gold, a commodity in limited and fixed supply, the money supply would remain stable and price inflation would be avoided.[Web of Debt, p. 98]

The quantity theory of money was propounded academically in 1911 by Yale University economist Irving Fisher. Fisher was a self-proclaimed socialist. His opponent was Ludwig von Mises, the Austrian economist, who refuted Fisher in his 1912 book, The Theory of Money and Credit.

Brown is so confused about monetary theory that she rejects the quantity theory of money here, yet she promotes Irving Fisher's 1911 book, The Purchasing Power of Money, on page 441. She then recommends for Fisher's call for a statistical "basket of commodities" as a reliable basis of fiat money. She praises John Maynard Keynes for having proposed the same idea (p. 442).

Brown argues against the classical economists (pre-1870). But she ignores the Austrian School, which rejects the following:

A corollary to that theory was the classical maxim that the government should balance its budget at all costs. If it ran short of money, it was supposed to borrow from the bankers rather than print the money it needed, in order to keep from inflating the money supply. The argument was a "straw man" argument -- one easily knocked down because it contained a logical fallacy -- but the fallacy was not immediately obvious, because the bankers were concealing their hand. The fallacy lay in the assumption that the money the government borrowed from the banks already existed and was merely being recycled. If the bankers themselves were creating the money they lent, the argument collapsed in a heap of straw. The money supply would obviously increase just as much from bank-created money as from government-created money. In either case, it was money pulled out of an empty hat. Money created by the government had the advantage that it would not plunge the taxpayers into debt; and it provided a permanent money supply, one not dependent on higher and higher levels of borrowing to stay afloat. [Web of Debt, p. 98]

The defenders of the gold coin standard argue that money should not be created out of thin air by either government or banks. The threat of bank runs on gold coins serves as a restraining factor on bank credit, except where the government authorizes banks to expand the currency. This was Mises's argument. Brown never mentions this.

Then Brown invokes Keynes.

The quantity theory of money contained another logical fallacy, which was pointed out later by British economist John Maynard Keynes. Adding money ("demand") to the economy would drive up prices only if the "supply" side of the equation remained fixed. If new Greenbacks were used to create new goods and services, supply would increase along with demand, and prices would remain stable. When a shoe salesman with many unsold shoes on his shelves suddenly got more customers, he did not raise his prices. He sold more shoes. If he ran out of shoes, he ordered more from the factory, which produced more. If he were to raise his prices, his customers would go to the shop down the street, where shoes were still being sold at the lower price. Adding more money to the economy would inflate prices only when the producers ran out of the labor and materials needed to make more goods. Before that, supply and demand would increase together, leaving prices as they were before. [Web of Debt, p. 99]

This was indeed Keynes's argument. The argument assumes that prices do not decline when new production increases the supply of goods and services. Austrian economics assumes that prices decline under a gold standard, but wealth increases.

Think of the price of computers over the last half century. Think of disk storage space. I bought a 10-megabyte Corvus hard disk drive -- external, the size of a shoebox -- in 1983. It cost $2,700 ($5,900 in 2010 dollars). Today, I can buy a 2-terabyte internal hard drive for under $100.

In a free market society on a gold coin standard, productivity rises and prices steadily fall. Keynes and Fisher opposed this operation of the free market. So does Ellen Brown. Keynes and Fisher called for the government to increase the quantity of money to keep prices stable. So does Ellen Brown. Keynes and Fisher trusted the state's paper money and distrusted the free market's gold coin standard. So does Ellen Brown.

Why do conservatives think Ellen Brown is a conservative? She is a left-wing statist.

For a detailed critique of Ellen Brown's economics, go here:

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