Chapter 11. The Multiplier.
The Magic of It.
We now come to the strange concept of the multiplier, about which some Keynesians make more fuss than about anything else in the Keynesian system.
System. Indeed, a whole literature has developed around this concept alone. Let us try to see
what Keynes means by this term.
In given circumstances, a definite ratio, to be called the multiplier, can be established
between income and investment, and, subject to certain simplifications, between the total
Total Employment and the Employment Directly Employed on Investment
This further step is an integral part of our theory of employment, since it establishes
a precise relationship, given the propensity to consume, between aggregate employment and
income and the rate of investment.
Page 113
Keynes gives credit to R.F.
Now, the average propensity to consume, the reader will recall, is the functional relationship between a given level of income in terms of wage units and the expenditure on consumption.
So, if C w is the amount of consumption and y w is income, both measured in wage units,
the function of C w has the same sign as the function of y w, but is smaller in amount,
i.e., d C w over d y w is positive and less than unity.
Page 96 What this means in simple and numerical terms
is that if out of three units of income, two are spent on consumption, the propensity to
consume will be 2 over 3.
Now in Chapter 10 and on Page 115, Keynes advances to the concept of the marginal propensity
to consume.
He defines this, however, by precisely the same mathematical expression and notation as
he has previously used to express what he now calls the average propensity to consume.
V. Delicit, D.C.W. over D.Y.W., page 115.
The marginal propensity to consume is the relation of the increase in consumption to
to the increase in real income when the income of the community increases.
The reader might not be inclined to imagine at first glance that either the average propensity
to consume or the marginal propensity to consume was a matter of much importance so far as
the business cycle or the extent of employment was concerned.
Keynes simply tells us that out of a given amount of income, or of increase of income,
some but not all of it will be spent on consumption, and some but not all of it will be saved.
Now economists have long pointed out that the greater the percentage of the national
income that is saved and invested, the more rapid, other things being equal, will be the
But just how any significant discovery concerning fluctuations in business and employment could
follow from the truism that people will spend something and save something out of their
incomes, it is difficult to see.
Yet Keynes does think he gets a magical result from this truism.
The Marginal Propensity to Consume is of considerable importance because it tells us how the next
increment of output will have to be divided between consumption and investment, page 115.
And from this, Keynes derives the magic investment multiplier, K. It tells us that when there
There is an increment of aggregate investment. Income will increase by an amount which is
K times the increment of investment. Page 115.
Let us try to find in plainer language what it is that Keynes is saying here. He explains
on the next page. It follows therefore that if the consumption psychology of the community
is such that they will choose to consume, e.g. nine-tenths of an increment of income,
then the multiplier k is ten, and the total employment caused by, e.g. increased public
works will be ten times the primary employment provided by the public works themselves.
p. 116-117. What Keynes is saying, among other things, is that the more a community spends
of its income and the less it saves, the faster will its real income grow, nor do the implications
of its own logic frighten him. If a community spends none of its additional income from,
This would mean that a small expenditure on public works would increase income without limit, provided only that the community was not poisoned by the President.
If, on the other hand, they, the community, seek to consume the whole of any increment of income, there will be no point of stability, and prices will rise without limit, but just how did prices get into it?
The propensity to consume and the multiplier, we have been assured up to this point, are expressed in terms of wage units, which, Keynes assures us, means real terms and not money terms.
Why didn't we hear anything about the effect on prices until we got to an infinite multiplier?
This leads us to still another peculiarity of Keynesian economics, which we shall examine at a later point, which is the assumption that increased activity and employment have no significant effect on prices and wages until full employment is reached, and then everything happens at once.
Only then does true inflation set in.
It is true, however, that the implications of their logic do frighten Keynes and the Keynesians just a little bit.
Their multiplier is too good to be true.
Moreover, when their schemes are tried and their multiplier does not miraculously do its multiplying, they badly need an alibi.
This is supplied by the doctrine of leakages.
Among the most important of these leakages are the following.
1. A part of the increment of income is used to pay off debts 2. A part is saved in the
form of idle bank deposits 3. A part is invested in securities purchased
from others, who in turn fail to spend the proceeds 4. A part is spent on imports, which
does not help home employment 5. A part of the purchases is supplied from
Excess stocks of consumer goods, which may not be replaced.
By reason of leakages of this sort, the employment process peters out after a while.
Not Fixed or Predictable
I have said that a whole literature has developed around this concept of the multiplier.
There are many different concepts, in fact.
The logical theory of the multiplier, which assumes no time lag, the period analysis concept,
which assumes time lags, the comparative statics analysis, and so on.
Immense ingenuity has gone into the mathematical development of these theories, but if the
reader wishes to economize his time before he plows through the monographs of the multiplier
What reason is there to suppose that there is any such thing as the multiplier, or that
it is determined by the propensity to consume, or that the whole concept is not just a worthless
toy, the kind of thing made depressingly familiar by monetary cranks?
There are, in fact, so many things wrong with the multiplier concept that it is hard to
know where to begin in dealing with them.
Let us try to look at one probable origin of the concept.
If a community's income, by definition, is equal to what it consumes plus what it invests,
and if that community spends nine tenths of its income on consumption and invests one
If a person spends one-tenth, then its income must be ten times as great as its investment.
If it spends nineteen-twentieths on consumption and invests one-twentieth, then its income
must be twenty times as great as its investment.
If it spends ninety-nine-hundredths of its income on consumption and invests the remaining
These things are true simply because they are different ways of saying the same thing.
The ordinary man in the street would understand this, but suppose you have a subtle man, trained
in mathematics.
He will then see that, given the fraction of the community's income that goes into
Next, the income itself can mathematically be called a function of that fraction. If
investment is one-tenth of income, income will be ten times investment, etc. Then, by
some wild leap, this functional and purely formal or terminological relationship is confused
with a causal relationship.
Next, the causal relationship is stood on its head, and the amazing conclusion emerges
that the greater the proportion of income spent, the smaller the fraction that represents
investment, the more this investment must multiply itself to create the total income.
I admit that all this sounds pretty fantastic, and I am at a loss otherwise how to explain
How Keynes came to think that such an amazing, causal mathematical relationship should exist.
Let us, however, look at other observations and notions that might give rise to the hypothesis
that there is such a thing as a multiplier.
When after a depression a business recovery sets in, then increased expenditure in any
The conspicuous agent in rousing business from its partial lethargy has often been some
propitious event, but these propitious events did no more than accelerate a process of business
and Business Recuperation already begun. Among the ultimate effects of a period of hard times, then, are a reduction in the prime and supplementary costs of manufacturing commodities and in the stocks of goods held by wholesale and retail merchants, a liquidation of business debts, low rates of interest, a banking position that favors an increase in loans and an increasing demand among investors for corporate securities.
Once started, a revival of activity spreads rapidly over a large part, if not all, of
the field of business.
For even when the first impulse toward expansion is sharply confined to a single industry or
a single locality, its effects in the restricted field stimulate activity elsewhere.
In part, this diffusion of activity proceeds along the lines of interconnection among business
enterprises.
One line leads back from the industries first stimulated to the industries that provide
raw materials and supplementary supplies.
Another line leads forward to the chain of enterprises that handle the increased output
of commodities.
The diffusion of activity is not confined to these definite lines of interconnection
among business enterprises.
It proceeds also by engendering an optimistic bias in the calculations of all persons concerned
with the active direction of business enterprises and with providing loans.
Most men find their spirits raised by being an optimistic company.
Therefore, when the first beneficiaries of a trade revival develop a cheerful frame of
mind about the business outlook, they become centers of infection and start an epidemic
of Optimism.
As it spreads, the epidemic of optimism helps to produce conditions that both justify and
intensify it.
Those who have a long-term acquaintance with the worlds of business and finance will recognize
this as an excellent realistic description of what actually happens in a period of recovery.
But it is clear that it is not a purely mechanical process, determined by some fixed, fundamental
psychological law from which we cannot escape, or by some rigid and predetermined multiplier.
It is true that some consumers begin to spend more because they have more from somebody
else, which they may have received in wages, say, from re-employment after idleness.
This spending of newly acquired money does of course tend to accelerate a recovery, but
in any case, in the days before compensatory government spending, the recovery was usually
initiated and certainly in large part continued by people who had finally ceased to be pessimistic
about the business future and had become convinced that prices were scraping rock bottom and
might even be due for an upturn.
Some of these people who initiate the upturn are entrepreneurs who have decided to restock
on raw materials and re-employ some workers.
They either borrow from the banks for this purpose or simply reactivate balances that
they have long allowed to remain comparatively idle.
Some of the people who initiate the upturn are consumers and not necessarily solely those
Optimism begets new income, which by being spent begets still more income, and so on.
Optimism, income, consumption and investment all interact, all mutually increase each other.
But there is never any precise, predictable mathematical relationship.
There is never any fixed or purely mechanical relationship among these elements.
Income, consumption and investment may be measurable quantities, at least in monetary,
though not in real terms.
But the state of business sentiment, the individual and composite expectations of Messers A, B, C, N, is not a measurable quantity and can never be put into a meaningful mathematical equation.
If optimism is already present, a small, new expenditure may touch off, or seem to touch off, a wave of expenditure and re-employment.
But if the outlook of the community is still basically pessimistic, if some prices or wages or interest rates are still generally regarded, for example, as being unrealistically or unworkably high, the new expenditure may be completely wasted so far as any stimulating effect is concerned.
In this whole process, the concept of a fixed or predictable or predeterminable multiplier is never of any use.
Saving and Investment Again
Keynes consistently fails to provide convincing deductive reasons for any of his leading propositions or laws.
Nor does he compensate for this by offering any statistical proof of them, or even providing any prima facie statistical presumption in their favor.
Instead, he gives us something like this.
It should not be difficult to compile a chart of the marginal propensity to consume
at each stage of a trade cycle from the statistics, if they were available,
of aggregate income and aggregate investment at successive dates.
At present, however, our statistics are not accurate enough.
One would suppose that he would wait until the statistics were compiled
before telling us what we would find.
It appears that some figures had been compiled, however, by Simon Kuznets, and though they
are very precarious, Keynes is surprised by what they show.
If single years are taken in isolation, the results look rather wild, but if they are
grouped in pairs, the multiplier seems to have been less than three, and probably fairly
One would suppose that Keynes would show the reader how these figures were obtained, what
years they covered, etc., but he does nothing of the kind.
On the contrary, he says that the marginal propensity to consume shown by these figures
In other words, if the statistics do not fit in with Keynes's preconceptions, it is the
statistics, not the preconceptions, that are to be suspected or thrown out.
If the facts do not substantiate the a priori theory, so much the worse for the facts.
Time and again, Keynes tries to carry his point by sheer ex cathedra pronouncement.
His evident success in carrying it off can only be attributed to the docility of academic
opinion.
The whole multiplier concept rests on the assumption of already existing unemployment.
This of course is a deliberate, even when tacit, assumption on Keynes's part, for it
is his contention that substantial unemployment is the general situation, and that full employment,
even when defined to allow for frictional unemployment, is only a special situation.
But this contention is never established.
It rests in turn on the assumption that there can be such a thing, and even that there normally
is such a thing as an equilibrium with unemployment. This, as we have seen, and we'll see more
fully later, is a contradiction in terms. For, while Keynes's multiplier and other concepts
assume unemployment, Keynes never correctly tells us the reasons for this unemployment.
Those reasons always involve some disequilibrium, some maladjustment in the interrelationships
of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money
The government spending may have to be so big and financed in such an inflationary manner
that it raises the nation's whole price level sufficiently to increase employment in the affected industries.
But even so, the employment could much more easily be brought about by price and wage adjustment
than by further government spending.
In fact, if unemployment is being caused by specific wage rates that are too high, and
a new government spending merely encourages the unions with excessive wage rates to demand
still higher wage rates, the new spending may not result in any net increase in employment,
and could even be followed by a decrease.
Another difficulty with Keynes's multiplier concept is that it does not clearly and consistently
and they distinguish between real income, or income measured in constant dollars, and money income.
True, he expresses his multiplier most of the time in terms of wage units, but we have already seen, page 64,
that he so defines wage units as to make them in fact not a quantity of employment,
but a quantity of money received by workers who are employed.
His wage units are, in brief, not real units, but monetary units.
And Keynes's multiplier jumps without notice from real terms to monetary terms.
This jump becomes flagrant on pages 116 and 117.
There we are told that if the propensity to consume is 9 over 10,
Then the multiplier k is 10, and the total employment caused by, e.g. increased public works, will be 10 times the primary employment provided by the public works themselves.
Only in the event of the community maintaining their consumption unchanged, in spite of the increase in employment and hence in real income, will the increase of employment be restricted to the primary employment provided by the public works.
But this passage is immediately followed by this sentence.
If, on the other hand, they seek to consume the whole of any increment of income, there
will be no point of stability and prices will rise without limit.
To repeat our question on page 137, how did prices get into this?
Just where did we jump from real income to prices rising without limit?
This brings us to another peculiar Keynesian theory, for each fallacy depends for its support
on other fallacies.
This is the theory that when there has been unemployment and demand increases for any
reason, the effect is wholly to increase employment and or volume of goods sold and never to increase
wage rates or prices until the point of full employment is reached.
Then, as by assumption there can be no more employment, prices will rise without limit.
Neither economic theory, general experience nor available statistics support this Keynesian
notion, but we shall postpone further analysis of it until a later point.
One fallacy in the multiplier that is alone sufficient to discredit it completely is the
The assumption that the entire fraction of a community's income that is not consumed
is hoarded, that no part of this unconsumed income is invested.
The propensity to consume, in brief, determines the multiplier only on the assumption that
what is not spent on consumption is not spent on anything at all.
If the propensity to consume is seven-tenths or eight-tenths or nine-tenths or anything
less than ten-tenths, the economic machine will run down unless investment rushes in
to fill the gap left by saving.
This investment can only be supplied by a deus ex machina, and this god turns out to
be the government with loan expenditure.
All these assumptions are not only false, in fact, but a contradiction of Keynes's own
formal definitions in the general theory of saving and investment.
For Keynes himself has assured us that, in Chapter 6, saving and investment have been
so defined that they are necessarily equal in amount, being, for the community as a whole,
merely different aspects of the same thing.
Page 74 He has also told us that The prevalence of the idea that saving and investment taken
in their straightforward sense can differ from one another is to be explained, I think,
by an optical illusion.
Page 81 Further, he has ridiculed The newfangled idea that there can be saving without investment
or investment without genuine saving.
Page 83 Yet the notion of a multiplier, depending
on a propensity to consume, rests on precisely this optical illusion and this new-fangled
view.
It rests on the assumption that there can be saving without investment.
What is involved here is partly a question of fact and partly a question of definition.
If we define saving as including both money and goods, and investment as including both
money and goods, the goods in both cases being measured in current money prices, then saving
and investment are at all times necessarily equal and, in fact, merely two names for the
same thing.
On these definitions the terms savings and investment could be freely interchanged in
in any context without change of meaning, or a common term such as un-consumed output
could be substituted for either or both.
But if we define savings exclusively in terms of money or even of goods plus money, and
if we define investment exclusively in terms of capital goods, either in real terms or
or at given prices, then there can frequently be discrepancies between saving and investment.
Here is where the new-fangled view has its importance.
For, when investment, by these definitions, exceeds genuine saving, there must be inflation,
and when saving exceeds investment, by these definitions, there must be deflation.
In fact, only on the assumption that investment without saving means that new money and credit
has been created, and saving without investment means that some former money and credit has
been retired or destroyed, is the discrepancy between saving and investment possible.
With a constant money and credit supply and constant prices, saving and investment, even
on these second definitions, must be equal.
And they must be equal at every moment under all conditions, of course, if saving money
is defined and treated as investing in money.
But Keynes's propensity to consume concept and multiplier concept would be meaningless
unless he used the terms savings and investment not as he has defined them in the general
He assumes that there can, in fact, be saving without investment and investment without saving.
And he makes this assumption in an extreme degree, to which nothing in the real world corresponds.
For his propensity to save depends, for its alleged deflationary effects, on the tacit assumption
that no part of savings is invested in money.
has alleged deflationary effects on the tacit assumption that no part of savings is invested.
His magically rejuvenating multiplier to work out perfectly assumes that this new investment
comes into being without savings.
In fact, the mathematics of the multiplier are upset if the recipients of the new income
which the new investment is supposed to create do anything but spend the whole of the new
Income on Consumption. If they save part of it, the multiplier is decreased. If they themselves
invest part of it, the multiplier is increased. Yet, this multiplier is supposed to be predeterminable
by a mathematical formula and used as a basis of policy and prediction.
Investment means government spending.
Closed scrutiny reveals still another peculiarity of the multiplier.
Investment is supposed to multiply employment and income, and yet the amount of investment
as such appears to be entirely irrelevant to the mathematics of the multiplier or the
reasoning on which it rests.
For, in connection with the multiplier, and indeed most of the time, what Keynes is referring
to as investment really means any addition to spending for any purpose.
Keynes shows not the slightest interest in real purpose of real investment, which is
to increase productivity, both in quantitative and in qualitative terms, and to reduce costs.
All he is interested in is additional spending, for any purpose, to produce his multiplier
effects.
By investment, when he speaks of the multiplier, he means government spending, on no matter
what, as long as it creates additional money.
This last idea is never explicitly introduced, but is constantly implied.
Loan Expenditure, he declares, page 128, even if wasteful, may nevertheless enrich
the community on balance.
And then he explains in a footnote,
It is often convenient to use the term Loan Expenditure to include both public investment
financed by borrowing from individuals and also any other current public expenditure
which is so financed.
Thus, loan expenditure is a convenient expression for the net borrowings of public authorities
on all accounts, whether on capital account or to meet a budgetary deficit.
What is really necessary to get the multiplier effect, in short, when we start calling things
by their right names, is not investment, but inflation.
is irrelevant to the multiplier. If, to take another illustration, we find that the community
is spending only 11 twelfths of its income on goods, whose names begin with the letters
A to W, inclusive, then we get everything to come out right by having the community
spend the other twelfth of its income on the goods beginning with the letters X, Y and
And it is of no importance whatever for this effect whether the A through W goods or the
X through Z goods consist wholly or partly of consumer goods or capital goods.
The word investment is merely being used in a Pickwickian or Keynesian sense, and the
great advantage of loan expenditure is not that it involves investment out of past income
but that it involves the printing of more money.
We shall have enough to do in this volume dissecting the errors of Keynes himself without
going into the supplementary or derivative errors introduced by some of the Keynesians.
For that reason, I shall make no effort here to analyze the foreign trade multiplier, which
contains in addition to all the fallacies in the multiplier concept itself, additional
In the first place, even granting all of Keynes's other peculiar assumptions, it is difficult
to understand just why the multiplier, except by sheer assertion, should necessarily be
be the reciprocal of the marginal propensity to save.
If the marginal propensity to consume is 9 over 10, we are told the multiplier is 10.
Why?
How?
We have already tried to guess, page 139, how Keynes might have arrived at this astonishing
notion.
But let us take an imaginary illustration.
Ruritania is a Keynesian country that has a national income of 10 billion dollars and
consumes only 9 billion dollars.
Therefore, it has a propensity to consume of 9 over 10.
But as in some way it manages to save 10 percent of its income without investing the 10 percent
in anything at all, it has unemployment of 10 percent.
Then the Keynesian government comes to the rescue by spending not one billion dollars,
but only one hundred million on investment.
For as the multiplier is ten, because Keynes has written out a mathematical formula which
makes it ten when the marginal propensity to consume is nine over ten, this one hundred
million dollars worth of direct new employment somehow multiplies itself to one billion dollars
of Total New Employment to Fill the Gap, and Low Full Employment is Achieved.
Expressing this in terms of employment, we might say, when the propensity to consume
of ruritania is 9 over 10, then unless something is done about it, only 9 million of ruritania's
working force of 10 million are employed.
It is then simply necessary to spend enough to employ directly 100,000 more persons and
their spending in turn will ensure a total additional employment of 1 million.
The question I am raising here is simply why such a relationship between the marginal propensity
to consume and the multiplier is supposed to hold.
Is it some inevitable mathematical deduction?
If so, its causal inevitability somehow escapes me.
Is it an empirical generalization from actual experience?
Then why doesn't Keynes condescend to offer even the slightest statistical verification?
We have already seen that investment, strictly speaking, is irrelevant to the multiplier,
that any extra spending on anything will do.
We have already illustrated this by dividing commodities into those beginning with the letters from A to W, and those beginning with the letters X, Y and Z.
But a still further reductio ad absurdum is possible.
Here is a far more potent multiplier, and on Keynesian grounds, there can be no objection to it.
Let Y equal the income of the whole community. Let R equal your, the reader's, income. Let V equal the income of everybody else.
Then we find that V is a completely stable function of Y, whereas your income is the active, volatile, uncertain element in the social income.
Let us say the equation arrived at is V equals 0.99999Y, then Y equals 0.99999Y plus R, 0.00001Y equals R, therefore Y equals 100000R.
Thus, we see that your own personal multiplier is far more powerful than the investment multiplier.
To increase social income and thereby cure depression and unemployment, it is only necessary
for the government to print a certain number of dollars and give them to you.
Your spending will prime the pump for an increase in the national income 100,000 times as great
as the amount of your spending itself.
The final criticism of the multiplier that must be made is so basic that it almost makes
all the others unnecessary.
This is that the multiplier and the whole unemployment that it is supposed to cure is
based on the tacit assumption of inflexible prices and inflexible wages.
Once we assume flexibility in prices and wages, and full responsiveness to the forces of the
market, the whole Keynesian system dissolves into thin air.
For even if we make the other thoroughly unrealistic assumptions that Keynes makes, even if we
assume, for example, that people save a third of their incomes by simply sticking the money
under their mattress and not investing it in anything, completely responsive wages and
prices would simply mean that wages and prices would fall enough for the former volume of
sales to be made at lower prices and for full employment to continue at lower wage rates.
When the money was taken out from under the mattress again, it would simply be equivalent
to an added money supply and would raise prices and wages again.
I am not arguing here that prices and wages are, in fact, perfectly fluid, but neither,
as Keynes assumes, are wage rates completely rigid under conditions of less than full employment.
And to the extent that they are rigid, they are so either through the antisocial policy
of those who insist on employment only at above-equilibrium wage rates or through the
The very economic ignorance and confusion in business and political circles, to which
Keynes's theories themselves make so great a contribution.
But this is a subject that we shall develop more at length later.
Paradox and Pyramids
In section 6 of chapter 10 on the multiplier, Keynes lets himself go in one of the irresponsible
All little essays in satire and sarcasm that run throughout the general theory as they
run through all his work.
As these essays rest on obviously false assumptions and as Keynes writes them with his tongue
more or less in his cheek, it might seem to be as lacking in humor to refute them seriously
as to refute a paradox of G.K. Chesterton or an epigram of Oscar Wilde.
But these little essays are the most readable and the most easily understood part of Keynes's
work.
They are quoted by many laymen with chuckles of approval and delight, so we had better
give them a certain amount of serious attention.
Keynes begins section 6 by assuming involuntary unemployment without explaining how it comes
about.
At the same time, he assumes that the only way to cure it is by loan expenditure, no
matter how wasteful.
Pyramid-building, earthquakes, even wars may serve to increase wealth if the education
of our statesmen on the principle of the classical economics stands in the way of anything better
If our statesmen were really educated in the principles of classical economics, they would
understand that unemployment is usually the result of union insistence on excessive wage
rates or some other price-cost maladjustment.
One of the most revealing paragraphs in this section is the footnote on page 128, which
It is often convenient to use the term loan expenditure to include both public investment
financed by borrowing from individuals and also any other current public expenditure
which is so financed.
Thus, loan expenditure is a convenient expression for the net borrowings of public authorities
on all accounts, whether on capital accounts or to meet a budgetary deficit.
This explains what Keynes really means by investment in his multiplier equations.
It is not investment in the traditional or the dictionary sense.
It means any government spending provided the money is borrowed, i.e. providing the
spending is financed by inflation.
Mises then goes on to write what he evidently considers a perfectly devastating satire on
gold and gold mining.
Gold mining, he tells us, which not only adds nothing whatever to the real wealth of the
world, but involves the disutility of labor, is the most acceptable to the orthodox of
all methods of creating employment.
If the treasury were to fill old bottles with banknotes, bury them at suitable depths in
and disused coal mines which are then filled up to the surface with town rubbish, and leave
it to private enterprise on well-trained principles of laissez-faire to dig the notes up again,
there need be no more unemployment, page 129.
This sentence tells us a great deal more about the prejudices and confusions of Keynes than
and it does either about gold, gold mining, the principles of private enterprise or the
purposes of employment.
There would of course be no need for private enterprise to dig up the banknotes.
The treasury could simply run off more on its printing presses for no more than it cost
for the ink and paper.
But there is a slight difference between digging up gold and digging up paper money which Keynes
neglects to mention.
This is that gold has kept its high value over the centuries, not only when it was the
international monetary standard, but even since it was dethroned, whereas paper currencies
by an almost inexorable law have sunk into worthlessness.
A compilation by Franz Pick in 1957 of the depreciation of 56 different paper currencies
showed that in the nine-year period from January 1948 to December 1956, for example, the American
dollar to which so many other currencies were ostensibly tied itself lost 15% of its purchasing
power, while the British pound sterling lost 34%, the French franc 52% and the paper currencies
The reason for this difference is that the quantity of gold that could profitably, i.e. with a surplus of proceeds over costs, be dug up and refined depends on natural factors largely beyond human control, whereas the amount of paper dollars that are printed, or that would be buried and then dug up under K-9,
Keynes's scheme would depend solely on the caprice of the politicians or monetary authorities
in power.
Keynes proceeds to patronize gold mines further.
He tells us that they "...are of the greatest value and importance to civilization, because
gold mining is the only pretext for digging holes in the ground which has recommended
itself to bankers as sound finance."
page 130. Only? One can think also of oil wells, water wells, canals, subways, railway tunnels,
house foundations, quarries, coal mines, zinc, lead, silver and copper mines, but it seems a
pity to spoil the noble lord's rhetoric. It is one of Keynes's fixed convictions, as it was of
Ancient Egypt was doubly fortunate and doubtless owed to this its fabled wealth, he writes,
in that it possessed two activities, namely pyramid building as well as the search for
precious metals, the fruits of which, since they could not serve the needs of man by being
and Consumed did not stale with abundance, page 131.
Keynes did not think that gold had value, because he could not understand the source
of its value.
The fact that nearly all men through the ages have valued gold only indicated in Keynes's
eyes that they were incurably stupid.
But perhaps the stupidity is with the critics of gold.
It is true, as those critics are always insisting, that you cannot eat or wear it, but it is
more satisfactory than custard pies or overcoats as a medium of exchange.
And it is enormously more satisfactory as a medium of exchange and a store of value,
as we shall see, than paper money issued in accordance with the political pressures or
bureaucratic whim