Harwood vs. Keynes

Friday, October 20, 2017

Inflation, economist and AIER founder Edward C. Harwood believed, is a tricky kind of legalized theft.

The theft has persisted for generations. That’s because John Maynard Keynes, the most renowned economist of our times, argued in favor of governments deliberately inflating. Harwood, in writings and in correspondence with Keynes, disagreed. He warned inflation devalues money and wrecks lives. People don’t start businesses or families. Businesses don’t expand.

Inflation, Harwood argued, is an economic mirage perpetrated though the central bank, the enabler of big government. It affects everyone. Those who thought they had enough money to achieve a goal suffer sticker shock. “Pensions dwindle, and lose their capacity to support life,” Harwood wrote in “The Money Mirage.”

However, some benefit. They are those who profit from the constantly expanding welfare state. Many welfare/warfare programs could not have been instituted if new money and debt had not been created by a federal government that today — by its accounting — owes some $20 trillion. (Several economists have said the true debt numbers have been undercounted. The government “is engaging in Enron accounting,” said Laurence Kotlikoff.)

Nevertheless, some believe debt and inflation are good, that they prevent depressions. The current system is celebrated by many economists and politicians. That’s despite the recessions and sluggish growth rates of the last 70 years, and the crashes in 1987, 2001, and 2008.

Harwood (1900–1980) warned about the problem of government money tinkering. The inflation swindle requires citizens to accept debased paper money through legal tender laws. Harwood believed a part of “the swindle” was the Keynesian idea of using fiscal and monetary policies to “keep the boom going.” The latter was a phrase from Keynes’ book, “The General Theory of Employment, Interest and Money.” “General Theory,” Harwood held, was one of the most important, if misguided, texts in economics.

Policies advocated in Keynes’ book inevitably led to the central bank inflating and congresses and presidents of both parties constantly running up red ink. The keep-spending philosophy seeped into the culture. Millions of Americans save or invest little or nothing, believing the state will provide for them. Result: millions of elderly poor with only Social Security as their income.

Many Americans follow or advocate the inflationist policies of Keynes’. Politicians use Keynes to justify welfare programs, deficits be damned. These include many Democrats — who denigrate those worried about deficits — and some supply-side Republicans, who push tax cuts. Many of the latter insist “deficits don’t matter.” Implicitly, these Republicans accept Keynes, even if they have never read him. Deficits matter because they give government an incentive to inflate away the ensuing debts.

Keynes wanted the central bank to create booms through cheap money: “Thus, the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last.” Further, Keynes wrote, “the right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

Harwood warned in the 1970s that “every episode of prolonged inflation has fostered maladjustments such as those obvious in the United States during recent years.” Harwood’s comments came when America was mired in stagflation. But Harwood fought an overwhelming intellectual tide.

In post–World War II America, many political leaders and intellectuals directly or indirectly subscribed to Keynes’ cheap-money ideas. Keynes said that those who worried about cheap money causing inflation had “an austere view.” The fear of inflation, Keynes wrote, “has no foundation at all apart from confusion of the mind.”

Still, by the 1970s, the bill was coming due for decades of Keynesian inflating. Twenty percent interest rates had arrived. These high interest rates wrecked industries depending on borrowed money. The latest round of inflating had begun just before the presidential election in 1972. President Nixon was convinced that the way to keep America out of recession was a new Fed chairman who would inflate.

Harwood Vindicated

Arthur Burns was put into office as Fed chairman by Nixon, with orders to create more money than the previous chairman, William McChesney Martin. Nixon blamed Martin for his narrow election defeat in 1960. He believed tight money policies tipped the election to Senator John Kennedy. This time he took no chances. Burns took office about a year before Nixon’s 1972 re-election campaign.

Nixon told Burns he expected the new chairman to keep interest rates low. (I invite anyone who wants to find some documentation on this point to see my “The Fed and Politics.”) One of Nixon’s aides bragged that the money supply would be ample because “we have Arthur Burns by the balls.”

Burns flooded the market with new money. Economic disaster ensued, though Nixon succeeded at getting re-elected. Besides promoting cheap money, Nixon ended the last link to the gold standard and ran big deficits. Nixon said he had “become a Keynesian in economics.”

These inflationary policies produced a Potemkin Village. They seemed to produce prosperity initially but after the 1972 elections, the economy blew up.

Cheap money along with reckless government spending policies were a shipwreck for those who had invested in fixed-rate investments — bonds or certificates of deposit — before this period of high inflation. They found their investments, inflation adjusted, lost buying power. For example, low-yielding Treasury bills that hadn’t kept up with high inflation rates became “certificates of guaranteed confiscation,” Harwood wrote.

By the end of Burns’ disastrous term in 1978, the chairman was a broken man. He was not reappointed. He all but admitted his failures. In his last meeting with the press, Burns complained that inflation “robs millions of citizens who in their desire to be self-reliant have set aside funds for the education of their children or their own retirement, and it hits many of the poor and elderly especially hard.”

Exactly Harwood’s sentiments.

Burns, in the same speech, said, “I don’t believe I exaggerate in saying that the ultimate consequence of inflation could well be a significant decline of economic and political freedom for the American people.”

Yet Harwood’s warnings of “inflation swindles” and his objections to Keynes have been repeatedly ignored, though never quite forgotten. Most lawmakers and central bankers have proved they were Bourbon kings. With the crash of 2008, they showed they “learned nothing and forgot nothing.”