America's Money Machine

172 PART III / DEBACLE OF AN IDEA
assurance in the immaculateness of his theorems, and they promised in
the capitalistic order what Marx promised for the socialistic. Both offered
a new world of arrangements that was perfectly explained in accordance
with mathematical logic. Actually, while Keynes professed to hold a traditional
view, and to uphold the capitalistic order that then seemed in such
dire need of defenders, the effect of his theories was to lead mankind
down the path of statism, of centralized, bureaucratic planning, and absorption
of all energies and all decisions in the governmental apparatus
as Marx himself had done.
Space does not here permit an extended discussion of Keynesian economics-a
subject on which already libraries exist-beyond the outline
ofcertain features as they bear upon the course ofmonetary development
in this country, that is to say, Federal Reserve policy and practice.
Keynes' economic theories had their beginning in a concern for the
unemployment that plagued Great Britain following World War I. A
million persons were chronically out of work. He thought a major cause
of this condition was the premature attempt to return to the gold standard,
which we have discussed in an earlier chapter. In a treatise, The
Economic Consequences ofMr. Churchill, 3 he argued that raising the international
value of the pound sterling to its pre-war parity had made sterling
exchange some 12 per cent more expensive to foreign buyers, which
meant that British goods for export cost foreign purchasers that much
more than formerly. This lessened the demand for British goods and
threw out ofemployment men engaged in making such products. Stated
in conventional terms, sterling was over-valued to the detriment of the
export trade.
The classical solution to this dilemma would be to reduce production
costs accordingly-which meant mainly wage rates, since other costs,
such as interest and depreciation, are relatively fixed. Such a reduction
in the wage level, Keynes argued, might bring more jobs, but the total
wage bill would not be affected (since a larger number ofworkers would
be working at lower individual wages) and hence the total purchasing
power of the community would remain at a depressed level. This would
tend to throw more men out of work, for the reason that not all wages
received go to buy goods that require men's labor, but some part is saved.
While some part of the saved portion will be invested in building new
factories, houses or other enterprises that give jobs, and hence is returned
to the stream of trade, a residue is not invested, but kept in the
till or sock.