Wednesday, 18 March 2015
Keynes though the quantity of money didn’t matter.
He said “Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.” (H/t to Lars Syll). That's from a letter from Keynes to Roosevelt in the 1930s.
What's Keynes on about? Of course its spending that matters rather than the stock of money, but to claim the stock has NO EFFECT AT ALL is going a bit far. When people win a lottery their weekly spending rises, doesn’t it? Of course I’m extrapolating from the micro to macro there which is always dangerous. However, there’s plenty of surveys been done into the effect that tax cuts or tax rebates have on household spending across the nation as a whole (which is macro) and the effect (amazing as this might seem) is the household spending rises as a result. E.g. see here, here and here.
Of course it's important to distinguish between commercial bank created money and central bank created money (base money). But Keynes refers to money created by the "public authority" in the above letter, so it's pretty obviously base money he's referring to.