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Economic Error #8: Keynes Was a Great Economist Because He Recommended Federal Budget Deficits.

Gary North
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Ellen Brown praises John Maynard Keynes for telling Roosevelt that the Federal government needed to run large deficits in order to end the Great Depression.

The dogma of the day was that the federal budget must be balanced at all costs. The novel idea that the government could borrow the money it needed was suggested by John Maynard Keynes, a respected British economist, who argued that this was a more sensible course than austerely trying to balance the budget when funds were not to be had. In an open letter in The New York Times, Keynes advised Roosevelt that "only the expenditures of public authority" could reverse the Depression. The government had to spend to get money into circulation.

Keynes has been called an elitist, because he was an intellectual with expensive tastes, wealthy friends and banker affiliations; but like Roosevelt, he had a strong streak of the can-do Populist spirit. At a time when conventional economists were gloomy naysayers maintaining that nothing could be done, Keynes was an optimist who thought like the Wizard of Oz. There was no reason to put up the recession, depression and unemployment. Balancing the budget by cutting jobs, at a time when people were already out of work, he thought was economic folly. The way to get the ball rolling again was just to roll up your sleeves and get busy. It could all be paid for on credit! [Web of Debt, p. 152]

She quotes a brief extract from an open letter from Keynes to Roosevelt in the New York Times in 1934. She provides no footnote. She provides no date. (It was June 10, 1934.)

She calls Keynes a Populist. She is a Populist. She compares him favorably to the Wizard of Oz. The Wizard is her model: a Greenbacker inflationist. She begins every chapter with a quotation from the book.

John Maynard Keynes was the most important economist of the 20th century. In 1936, he provided a theoretical case for what all governments were doing: running huge deficits. The governments were spending on huge projects in order to keep people working.

What Brown does not like is that Keynes did not recommend the printing of fiat money to pay for the deficit. She says that he changed his views by 1945.

Keynes started thinking more like the Greenbackers at the end of World War II, when he proposed a debt-free Greenback-style currency called the "Bancor" to serve as the reserves of the International Monetary Fund (the fund established to stabilize global currencies). But by then England's economic power had been exhausted by two world wars and America called the shots. [pp. 152-53]

She is wrong. Keynes did recommend the printing of fiat money. The General Theory of Employment, Interest, and Money (1936) devotes respectful support for the same fiat money schemes that Ellen Brown and the Greenbackers recommend (pp. 353-58, 370-71). This indicates that she has never read Keynes's major book.

There are many free market criticisms of Keynes's economics. This criticism goes back to the early 1940s. Henry Hazlitt wrote a line-by-line refutation in his book, The Failure of the "New Economics" (1959). You can download it for free here. Murray Rothbard immediately wrote a favorable assessment of it for National Review. You can read it here.

We live in the world of Keynesian deficits, of back-to-back $750 billion stimulus laws (2008, 2009). The fact that Ellen Brown praises Keynes indicates how far to the left she is.

Then she adds this: "Roosevelt was slow to go along with Keynes's radical solutions, but as the Depression got worse, he decided to give them a try" (p. 153). In fact, it was the other way around. Roosevelt was running for a second term by the time Keynes's book was published in 1936. The New Deal had been running large deficits for over three years. So had all the other major nations. Keynes was a late-comer to the deficit party.

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

http://www.garynorth.com/public/department141.cfm


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