Summary
This book argues that the price level is not mysterious but is governed by controllable influences and proposes methods for the future regulation of money. Central banking and currency authorities must have variables _n_ (quantity of money) and _r_ (propensity to hoard or hold idle balances) under control. Fluctuations in the price level are characterized by changes in _k_ (propensity to hoard money) and _k´_ (propensity to hold cash for other reasons), which are not directly controllable and depend on public and business moods. Stabilizing the price level involves influencing _k_ and _k´_, and when this fails, deliberately varying _n_ and _r_ to counterbalance movements in _k_ and _k´_.
The work re-states the Quantity Theory of Money and introduces the Theory of Purchasing Power Parity to explain the relative value of national currencies. It examines alternative aims in monetary policy, such as devaluation versus deflation, and stability of prices versus stability of exchange, while also considering the restoration of a gold standard. The book aims to provide theoretical foundations for practical suggestions regarding the regulation of money in Great Britain and the United States.
Key concepts
- Quantity Theory of Money — A fundamental theory stating that the price level is governed by definite, analysable influences.
- Theory of Purchasing Power Parity — Explains the relative value of two distinct national currencies, rather than the commodity-value of a single currency.
- _n_ (quantity of money) — A variable that central banking authorities should have under direct control to stabilize the price level.
- _r_ (propensity to hoard or hold idle balances) — A variable that central banking authorities should have under direct control, influenced by bank-rate and borrowing from banks.
- _k_ and _k´_ (propensity to hoard money and propensity to hold cash) — Variables not directly controllable, dependent on the mood of the public and business world, which influence cyclical fluctuations.
- Inflation as a Method of Taxation — Examines how inflation can be used as a means of taxation.
From the book
The course of events during the nineteenth century favoured such ideas. During its first quarter, the very high prices of the Napoleonic Wars
For the next seventy years, with some temporary fluctuations, the
Before the war these medium fortunes had already begun to suffer some
Popular questions readers ask
- Keynes asserts that the existing organization of society "cannot work properly if the money...is undependable." Explain, using a specific example or analogy, how an unstable monetary "measuring-rod" directly disrupts the rational economic behavior of both the "private investor" and the "business man" as described in the text.
- The preface links various societal problems, from "unemployment" to "profiteering," to the "instability of the standard of value." Choose two of these consequences and delineate the precise causal steps through which monetary instability leads to each, as if explaining it to someone unfamiliar with economics.
- Keynes introduces "risk" as a distinct, fourth cost of production, arguing it's "greatly aggravated by the instability of the standard of value." In your own words, describe what constitutes these "wastes of _Risk_" and how the implementation of "sound monetary principles" would specifically reduce them.
- The author suggests that society's current economic arrangements are "in accord with human nature." What specific human economic behaviors or motivations does Keynes assume are fundamental, and how does an "undependable" monetary standard fundamentally undermine these presumed aspects of human nature?
- Keynes contends that while "conservative notions consider themselves more in place than in currency," the "need of innovation is more urgent." Based on the identified problems, what foundational "conservative notions" about currency might Keynes be implicitly challenging, and what kind of "new ideas" is he preparing the reader to receive?