How Keynes Put a Ticking Time Bomb Under Capitalism

My goal is to make you mad at the evil being wrought in the name of fighting inflation and maximizing employment.

My goal is to make you mad. Not at me (though I expect to ruffle a few feathers with this one)—but at the evil being wrought in the name of fighting inflation and maximizing employment. And at the aggressive indifference to this evil, exhibited by the capitalists, the gold bugs, and the otherwise free-marketers.

So, today I am going to do something I have never done. I am going to rant!

In researching several recent articles, I reread old passages from Keynes. Consider these snippets:

“For a little reflection will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated wealth.

“In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

“Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital.”

Keynes wrote those excerpts in The General Theory of Employment, Interest, and Money in 1936. Before I pick it apart, I want to cite again what he said 14 years earlier, in The Economic Consequences of the Peace.

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

“… the fatal process which the subtle mind of Lenin had consciously conceived.”

So in 1922, Keynes clearly describes how to overthrow capitalism. At that time, he couched it in (and behind) Lenin’s alleged words (it’s controversial whether Lenin really did say this). But it’s clear that he understood it, much more clearly than his latter-day critics.

And what the hell does a “gradual disappearance of a rate of return” mean? This means pushing the rate of interest down to zero.

Then in 1936, he writes about “enormous social changes,” about a “gradual disappearance of a rate of return on accumulated wealth.” No longer does he hide behind Daddy Lenin.

And to what social change would he be referring? Would it be “to destroy the Capitalist System”? And what the hell does a “gradual disappearance of a rate of return” mean? This means pushing the rate of interest down to zero.

Keynes well knew that asset prices are the inverse of the rate of return. He understood that this meant that asset prices would skyrocket! And he notes that this “does it [the destruction of the capitalist system] in a manner which not one man in a million is able to diagnose.”

“The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.” Today, this is called the problem of inequality, which the capitalists and otherwise free-marketers actually defend. They think that this rising disparity between asset owners and wage earners is a feature of free markets! Keynes knew better.

Getting back to Keynes, he said, “all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

A gamble and a lottery. Huh? Like speculating on stocks, ICOs (when new crypto currencies are sold), precious metals, real estate, and everything else?

He laid out his plan to destroy—in clear language: this is no sleep-aid full of differential equations and language designed to obfuscate.

Keynes is the Ellsworth Toohey of economics. Toohey, the villain in The Fountainhead, was portrayed as very intelligent—and evil. He used his smarts to bamboozle people into undermining themselves. Keynes did it on an even larger scale.

He gave us the recipe for “overturning the existing basis of society.” All you have to do is “a continuing process of inflation,” which will “confiscate, secretly and unobserved, an important part of the wealth of their citizens.” This “brings windfalls, beyond their deserts and even beyond their expectations or desires” to the “profiteers, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.” Finally, this process “engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

The only leap that I am making would seem to be from “inflation” to “the euthanasia of the rentier.” People today think of inflation only in terms of one of its possible effects: rising prices. This is the fallacy of the frozen abstraction, which Ayn Rand said “consists of substituting some one particular concrete for the wider abstract class to which it belongs …”

Note what Keynes first says about the process of inflation: “… governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Rising commodity prices are one possible consequence. But rising asset prices are another, and this also fits Keynes’ recipe. Note that his discussion of “enormous social changes” and the “oppressive power of the capitalist to exploit” is not about rising commodity prices, but about falling interest rates.

Keynes sees the connections between: (1) confiscating the wealth of the people, (2) generally impoverishing the people, (3) but arbitrarily enriching a few, (4) which means some prices rise and those who bought those things profit, (5) and the process of wealth-getting degenerates into a gamble and a lottery, (6) pushing interest rates down to zero, (7) which means pushing asset prices to infinity, (8) leading to resentment against the enriched even by members of their own bourgeois class, (9) which causes the breakdown of relations between debtors and creditors, and finally (10) the best way to destroy the Capitalist System, (11) in a manner which not one man in a million is able to diagnose.

Diabolical and heinous. That destroyer was not only malevolent but smart enough to devise such an evil scheme, and persuasive enough to set the entire world on the path to destruction.

Let me be 100% clear: this is the path to the destruction of civilization itself.

There, as concisely as I can state it, is the problem we face today. At least, those of us who recognize it, face it. However, I named three groups who generally don’t recognize it. They are part of the 999,999 who Keynes said are unable to diagnose it: the capitalists, the gold bugs, and the otherwise free-marketers.
 

Who Will Fight the Keynes’ Express to Ruin?

Capitalists, gold bugs or free-market economists might reform our monetary system someday, but not today.

Previously, I complained about the problem with our monetary system and its trajectory: falling interest rates is Keynes’ evil-genius plan to destroy civilization. Now, I continue the theme—if in a more measured tone—addressing the ideas predominant among the groups who are most likely to fight against Keynes’ destructionist plan. They are: the capitalists, the gold bugs, and the otherwise free-marketers. I do not write this to attack any particular persons, nor indeed as an attack at all. My purpose comes from my belief that to fix a problem, one must understand the nature of the problem.

I highlight these groups because, if there is ever to be a real movement to reform our monetary system, it would come from one of these groups or, ideally, an alliance among all three. However, that is not in the cards today. Let’s look at why not.

The Capitalists

First are the capitalists. By capitalist, I do not mean those who advocate an unregulated, unshackled, unfettered, unrestricted, uncontrolled laissez-faire social system in which each person is free to produce and trade with others. I mean those who make money, who enjoy making money, and defend the making of money. This group is represented by Wall Street, the One Percent, or the Fat Cats.

Indelibly seared into my own brain is the Q&A with then-President of the Dallas Federal Reserve, Dick Fisher. Someone asked him about the wealth effect (the term economists use to describe the increase in spending, and hence GDP, when asset prices rise). He said expansively, “Well, let me just say that the wealthy have been … very affected!” The room, full of one-percenters and aspiring one-percenters, gave a nice bit of applause to this statement.

For all too many Wall Streeters play at criticizing the Federal Reserve (Fed), but they want the same thing that the Fed wants.

For all too many Wall Streeters play at criticizing the Federal Reserve (Fed), but they want the same thing that the Fed wants. They want smoothly rising asset prices, so they can safely use maximum leverage to make their bets, and maximize their profits.

They will happily use—and thereby reinforce—whatever measures paint a picture of a good economy. Because a good economy justifies rising asset prices. For example, if GDP goes up then that should be good for stocks and real estate.

It needs to be said. If you break a window, or the government borrows money to dole out welfare, it adds to GDP! This is not a recommendation for breaking windows or doling out welfare. It is a damning indictment of GDP as a measure of the economy.

Unfortunately, the capitalists are not receptive to this argument (or the discussion of Keynes’ evil plan discussed previously). Upton Sinclair explains why not:

“It is difficult to get a man to understand something when his salary depends upon his not understanding it!”

Also, and this is a considerable force, no one likes to be told that the basis of his career is profiteering on an illegitimate regime. It is much easier to deny the illegitimacy (i.e., argue it’s legitimate) than to confront that uncomfortable truth.

The Gold Bugs

Let’s move on to the gold bugs. Are the gold bugs among the one-in-a-million who see the root of the problem? Or do they see the capitalists getting rich, and want the same for themselves? They see stocks and bonds and real estate going up, and the capitalists profiteering from it. They just want their preferred asset, gold, to go up. They confuse the gold standard with gold as a speculation and the price of gold increasing.

As the capitalists traffic in the collectivist faux-measures like GDP, the gold bugs traffic in the conspiracy theories such as Libya was going to lead an African gold standard, China is about to make the yuan gold-backed, the world is rejecting the dollar as reserve currency, or the International Monetary Fund is going to impose a new global currency that will be partially gold-backed.

The capitalists promote GDP because they think it will help conventional asset prices rise. The gold bugs promote conspiracy theories because they think it will help gold prices increase.

I will conclude this section with a headline (as I recall it) that made the rounds a year or two ago: “Nuclear war in Korea will be good for gold.” Those who traffic in such views are not thinking about reforming the monetary system (or the horrors of nuclear war!). They are thinking of getting rich—gaining more of the very dollars they tell you will be worthless by tomorrow morning.

The Otherwise Free-Marketers

Lastly, let’s look at the otherwise free-marketers. I use this term for people who advocate free markets—except in money and credit. Milton Friedman was the archetype. Here is Friedman in “The Case for Flexible Exchange Rates”:

“The argument for a flexible exchange rate is, strange to say, very nearly identical with the argument for daylight savings time. Isn’t it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual separately change his pattern of reaction to the clock, even though all want to do so. The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure.”

This was a few pages after he declared that “Wage rates tend to be among the less flexible prices.” So, the man who is widely believed to stand for people being “free to choose” is arguing in essence that it’s better for the Ministry of Time to change the public’s clock, than for people be free to choose what time to open their offices.

When it comes to money and credit, they [Milton Friedman and his followers] have a huge blind spot when it comes to an actual free market.

He, and his ideological successors today, may stand for eliminating tariffs, lower minimum wages, and repealing rent control, but when it comes to money and credit, they have a huge blind spot when it comes to an actual free market.

They think a free banking system can be built on top of a base of fiat currency and a central bank (as one prominent economist said to an audience in which I sat). The only real debate among the otherwise-free-market economists is whether the central bank should adhere to a fixed rate of increase of the quantity of dollars (what Friedman called the K% Rule), whether it should have a strict policy of price stability (an Orwellian phrase which means chronic 2% rising prices), whether it should have its current dual management of prices and unemployment, whether it should follow some more complex formula such as the Taylor Rule, or whether it should follow an alternative simple rule such as maintaining a fixed rate of GDP growth.

Why do they hold this assumption—that money depends on government, unlike food and clothing and medicine and iPhones which obviously don’t? It’s not that there is no theory of money that argues that money is not a product of the state.

The assumption derives, in part, from an unshakeable faith in the so-called business cycle. This view holds that a free market is prone to cycles of boom followed by bust. In this view a free market, free from all government interference (which is commonly, but not exclusively, monetary—and monetary interference is commonly, but not exclusively by a central bank) has an intrinsic tendency to excesses of both growth and contraction.

Central Planning to Correct Capitalism’s Boom-Bust Cycle

This view, that capitalism has an inherent cycle, was promoted by Leninist economist Nikolai Kondratiev. When Lenin died, and Stalin took over, Kondratiev’s idea got him into trouble. Though a Marxist, his view of cycles was against the orthodoxy. A true Stalinist communist believes that capitalism collapses once and finally. It does not recover for more cycles. So comrade Kondratiev was sent to the gulag (and eventually killed).

This same view of cycles is promoted today by the otherwise free-marketers. The idea of cycles does not necessarily mean a central planner must smooth out such cycles. However, it is an important justification and tends to lead most adherents to that view. If cycles come from free markets, then surely the central planner can smooth them out somehow?

It was for this reason that they created the Federal Reserve in 1913. And it is for this reason that the Fed and its interference in markets are still justified today.

Most of the otherwise-free-marketers are against gold. They sense (as do the overt socialists and central planners) that gold stands in opposition to central planning. As Alan Greenspan wrote in 1966, “that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.”

However, let’s move on to a group that promotes a synthesis of central planning and gold. Their root economic error is to mistake redemption for purchase. Back in the days of the gold standard, one deposited a dollar’s worth of gold and had the right to redeem a dollar’s worth of gold. This was not a price. It was merely the standard for coins and bank deposits. It is akin to an Internet standard that says a certain kind of packet should be 512 bytes. It is not dictating the length of a message, just that longer messages must be broken up (for the sake of efficient handling by Internet routers).

But this group seeks to have the Fed impose, not a constant rate of inflation (nor create a constant rate of growth), but to have the Fed impose a constant price of gold. Like all price-fixing schemes, it will fail when the market moves against it.

The otherwise free-marketers do not address any of the allegations I have made against the regime of irredeemable currency. I have written tens of thousands of words arguing that debt necessarily grows exponentially. And tens of thousands more on the unhinged interest rate, which rose relentlessly until 1981, and which has been falling ever since. The falling interest rate causes many ills, and is the embodiment of Keynes’ brilliantly evil plan to destroy the capitalist order, euthanize the rentier (i.e. savers and investors), and lull the capitalists into supporting it because the process makes them feel richer and richer, as they consume their capital in an endless orgy of endlessly rising asset prices.

If somebody doesn’t do something, we will reach Keynes’ long run. That’s when, he conceded, “we’re all dead.”

Monetary Metals is doing something. Paying interest on gold is the path to once again using gold as a medium of exchange.
 

Related Posts:

1. China Now Sets the World Gold Price—Preparing for A Gold-Backed Currency
2. Transcript: Ayn Rand and the Austrian Economists
3. Transcript: Nicolás Cachanosky Interviewed on The Savvy Street Show

   

About the Author: Keith Weiner

Keith Weiner is president of the Gold Standard Institute USA in Phoenix, AZ, and CEO of precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He speaks and writes about free markets, money, credit, and gold.