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Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975)

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Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975)

From Chapter 2: Of Coins and Treasure

Origin of Coinage

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 17 to 18

"Metal was an inconvenient thing to accept, weigh, divide, assess as to quality in powder or chunks, although more convenient in this regard than cattle. Accordingly, from the earliest known times and more likely somewhat before, metal was made into coins of predetermined weight. This innovation is attributed by Herodotus to the kings of Lydia, presumably in the latter part of the eighth century B.C.:

All the young women of Lydia prostitute themselves, by which they procure their marriage portion; this, with their persons, they afterwards dispose of as they think proper . . .

. . . The manners and customs of the Lydians do not essentially vary from those of Greece, except in this prostitution of the young women. They are the first people on record who coined gold and silver into money, and traded in retail.(1)

It seems possible, based on references in the Hindu epics, that coins, including decimal division, were, in fact, in use in India some hundreds of years earlier.(2)

(2) Alexander Del Mar, History of Monetary Systems (London: Effingham Wilson, 1895; New York: Augustus M. Kelley, 1969), pp. 1-2.

From Chapter 2: Of Coins and Treasure

Debasement of Roman Coinage

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 19

"As early as 540 B.C., Polycrates of Samos is said to have cheated the Spartans with coins of simulated gold.

With the passage of time and depending on the financial needs of rulers, their capacity for resisting temptation, which was generally modest, and the private development of the peculative arts, coinage had a highly reliable tendency to get worse. The Greeks, notably the Athenians, seem to have resisted debasement out of a rather clear understanding that htis was a short-run and self-defeating expedient and that honesty was, at a minimum, good commercial policy. After the division of the Roman Empire and the reassertion of Greek influence at Constantinople the bezant was for several centuries the world symbol of sound money, everywhere as acceptable as the gold it contained.

By contrast, the history of the highly developed coinage of Rome itself, as legend has sufficiently established, was one of steady debasement, beginning, it is commonly supposed, in consequence of the financial pressures of the Punic Wars. In time, this had the effect of converting the empire from a gold and silver to a copper monetary standard. By the time of Aurelian the basic silver coin was around 95 per cent copper. Later its silver content was brought down to 2 per cent.(4) Modern coin collectors, it has been suggested, now own the good gold and silver coins that were held back in hoards and which, with the slaughter, urgently compelled departure of normal demise of their owners, were they orphaned and forgotten. (5) In time it would be asserted that the debauchment of the currency caused the downfall of Rome. This historiography - the tendency to attach vast adverse consequences to monetary behaviour of which the observer happens to disapprove - is one which we will find frequently to recur. It should, needless to say, be regarded with the utmost suspicion."

From Chapter 2: Of Coins and Treasure

Origin of the Spanish Gold and Silver from the Americas

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 23 to 24

"Where Spain is concerned, legend regularly persists against the strong burden of fact. Possibly this is because Spanish historians, unlike those of other countries, have rarely been aroused by national conceit. They have been content to assume the worst. The Holy Inquisition in Spain remains in the minds of all as the paramount example of public cruelty, at least until Hitler. It is not something one would wish to praise. But the number of Jews, Marranos and other heretics who fell victim to its professedly judicial procedures during the three centuries of its sway - a few thousand at most - were fewer than were, on occassion, slaughtered summarily in the Rhineland cities in a single year. The Spanish Armada remains to this day the classic case of overwhelming and pompous military power brought to defeat by an inferior but far more sanguinary and alert foe. Against this belief the truth has never made headway. It is that the English has nearly equivalent tonnage of much better designed men-of-war which were much more heavily gunned and much better manned and thus made up an altogether superior force. (8)

Similarly the accepted view of the American treasure of Spain. The legend holds it to be gold looted from the temples of the Aztecs, extracted as a ransom by Francisco Pizarro for Atahualpa - the wonderful roomful of gold artifacts demanded by Piazarro for the Inca - or surrendered by the Indians after persuasion of a uniquely painful sort. The treasure was then conveyed to Spain by galleons, many of which fell victim to the hordes of pirates that patrolled the Spanish Main and who were justified at least partly in their theft by the yet greater criminality and avarice of the Spaniards.

The treasure looted from the temples or extracted from the Indians was, in fact, a trifling part of the total. The overwhemling part was mined. Nor was the treasure gold. Nearly all, after the first years, was silver. Beginning with the decade of 1531 through 1540, the weight of silver was never less than 85 per cent of the toal and from 1561 through 1570, never less than 97 per cent.(9) San Luis Potosi, Guanajuato and the other rich silver mines of Mexico, some of which continue to operate to the present day, and their counterparts in Peru were the source of the American treasure. Finally, by far the greatest part of it was conveyed safely and routinely to Spain. Two or three bad years apart, the losses to piracy, righteous and otherwise, were slight. This continued to be the case until the 1630s, after which the richest ore having been exploited, exports of silver declined."

(8) '[By] 1588 Elizabeth I was the mistress of the most powerful navy Europe had ever seen . . . a fleet capable of outsailing and outmanoeuvring any enemy in any weather, and at its chosen range . . of outgunning him decisively.' Garrett Mattingley, The Armada (Boston: Houghton Mifflin Co., 1959), pp. 195-6.

(9) Hamilton, American Treasure and the Price Revolution in Spain, 1501-1650, p. 40. Therold Rogers, in his classic study of English prices made in the last century speaks of the large effect of new silver and the slight effect of new gold. A History of Agriculture and Prices in England, vol. 5, 1583-1702 (Oxford: Clarendon Press, 1887), p. 779.

From Chapter 2: Of Coins and Treasure

Gresham's Law

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 20

"In the ancient and medieval world the coins of different jurisdictions converted at the major trading cities. If there were any disposition to accept coin on faith, it was inevitably the bad coins that were proffered, the good ones that were retained. Out of this precaution came, in 1558, the enduring observation of Sir Thomas Gresham, previously made by Oresme and Copernicus and reflected in the hoarding of the good Roman coin, that bad money always drives out good. It is perhaps the only economic law that has never been challenged, and for the reason that there has never been a serious exception. Human nature may be an infinitely variant thing. But it has constants. One is that, given a choice, people keep what is best for themselves, i.e., for those whom they love the most."

From Chapter 4: The Bank

Thomas Jefferson and banks

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 38

"Though is was willing to have banks for the purpose of deposit, Thomas Jefferson strongly opposed their issue of notes. Writing to John Taylor in 1816, he agreed that banking establishments were more to be feared than standing armies."

From Chapter 4: The Bank

Gold, Bank notes and Britain against Napoleon and the US

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 44 to 45

"Over the end of the century Britain was at war alternately on two fronts - first with the American colonies (with which, incidentally, differences of view over issuing money were an important cause of friction), then with Napoleon and then again with the new Republic. War had is usual consequences. Money was needed for sustaining the armies in the field, for the fleet and for the subsidies to allies that reflected the (for Britain) humane policy of contributing from more abundant wealth as allies contributing from more abundant manpower. Pitt was relentless and many thought ruthless in his demands on the Bank for loas. Though taxes were increased, and an income tax, also called a property tax, was levied against heavy resistance, the need continued. In the closing years of the century Bank reserves dwindled, and there were occasional runs. Finally, in 1797, under conditions of great tension which included the thought that the French might soon be landing, the Bank suspended the right of redemption of its notes and deposits in gold and silver. The principal immediate consequence was the prompt disapperance of gold and silver coins and a shortage of coins for modest transactions. People passed on the notes and kept the metal. Gresham again. The Bank hurriedly printed one- and two-pound notes, and it also redeemed froms its vaults a store of plundered Spanish pieces of eight. The head of George III was stamped over the head of the Spanish monarch, inspiring an anonymous but notable anti-Establishment poet to write:

The Bank, to make their Spanish dollars pass,
Stamped the head of a fool on the neck of an ass.

The needs of the government continues to press. Loans and the resulting note issues continued to increase. And now so did prices and the price of gold. Wheat, which was six shillings and ninepence a bushel at Michaelmas in 1797 and at the same level a year later, when to above eleven shillings in 1799 and to sixteen shillings the following year. Bread went up accordingly. The prince of uncoined gold bullion advanced substantially in the same period. In the next few years prices receded somewhat, only to rise sharply again. All this was a matter of concern, and, in reflection of the distribution of power in the British polity of the day, the concern was focused not on the price of food but on the price of gold. In consequence, in 1810, the House of Commons impanelled a committee to inquire into the matter - the Select Committee on the High Price of Gold Bullion. Its principal task, which many would think involved a different phrasing of the same question, was to acsertain whether Bank of England notes, the basic money, had falled or the price of gold has risen. The committee deliberated and duly found against the notes."

From Chapter 4: The Bank

David Ricardo and the Gold Standard

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 47 to 48

"By far the most memorable participant in this debate was a London stockbroker of Jewish provenance who, unknown to himself or anyone else, was, by this discussion, launching one of the most famous careers in economic thought. Some would later count him the greatest of all economists. This was David Ricardo, and he was an uncompromising supporter of the Bullion Committee and of what soonw as to be known over the world as the gold standard. 'During the late discussions on the bullion question, it was most justly contended, that a currency, to be perfect, should be absolutely invariable in value.' After conceding that precious metals could not be counted upon to be quite so invariable and perfect ('they are themselves subject to greater variations than it is desirable a standard should be subject to. They are however, the best with which we are acquainted.'). Ricardo when on to hold that, without such a standard, money 'would be exposed to all the fluctuations to which the ignorance or the interests of the issuers might subject it'. He was not opposed to bank notes. He thought them economical and a great convenience. But let htem always be fully convertible into metal on demand.

Ricardo's was in a great tradition of economic counsel - one that is superb in willing the ends, weak in willing the means. Or, as a recent historian has gently suggested, he was 'as a theoretical economist, apt to be blind to what was happening under his nose - for example, the fact that the country was at war'. (13 - Guiseppi, p 79.) To this detail Pitt, however, would not be blind; whatever the effect on the price of bullion, he had the problem of Napoleon. He continued to come to the Bank for loans. Ricardo was triumphant in principle, failed only as a matter of practical necessity.

But in the end he won also in practise. Reputable opinion continued to be strongly on his side. In 1821, with the war well over, full convertibility was restored at the old rate of exchange between notes and gold. Ricardo, on this as on other matters, had conquered England 'as completely as the Holy Inquisition conquered Spain'.(14)

(14) John Maynard Keynes, The General Theory of Employment Interest and Money (New York: Harcourt, Brace and Co., 1936), p. 32.

From Chapter 4: The Bank

Dangers to the Gold Standard

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 53

"A greater danger to gold was war. The gold standard in the last century owed much to the intelligent management of the Bank of England - for a brief moment, central banking was an art. It owed much more to the British peace. In the next century warring governments would, as did that of Pitt, turn to their central banks for the money that they could not raise in taxes. And no bank, whatever its pretence to independence, would even think of resisting.

Most dangerous of all would be democracy. The Bank of England was the instrument of the ruling class. Among the powers the Bank derived from the ruling class was that of inflicting hardship. It could lower prices and wages, increase unemployment. These were the correctives when gold was being lost; euphoria was excessive. Few or none forsaw that farmers and workers would one day have the power that would make governments unwilling to impose these hardships even in so righteous a cause as defence of the currency.

However, it was early seen that the interests of the rich in these mattes could differ from those of others. Writing in 1810, Ricardo observed that:

The depreciation of the circulating medium has been more injurious to monied men. . . It may be laid down as a principle of universal application, that every man injured or benefited by the variation of the value of the circulating medium in proportion as his property consists of money, or as the fixed demands on him in money exceed those fixed demands which he may have on others.(19)

Farmers, by contrast, were helped:

He [the farmer], more than any other class of the community is benefited by the depreciation of money, and injured by the increase of its value.(20)

In England the triump of Ricardo's monied class was complete or nearly so. In the United States, however, it was subject to the sharpest of challenges. In one form or another, this challenge was to dominate American politics for the first century and a half of the Republic. Only the politics of slavery would divide men more angrily than the politics of money."

(19) Ricardo, vol. 3, Pamphlets and Papers, 1809-1811, p. 136.

(20) Ricardo, Pamphlets and Papers, pp. 136-7.

From Chapter 5: Of Paper

American Colonists not liking taxes in any form

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 55

"A number of circumstances explain the pioneering role of the American colonies in the use of paper money. War, as always, forced financial innovation. Also, paper money, like the Bank of England loans, was a substitute for taxation, and, where taxes were concerned, the colonists were exceptionally obdurate; they were opposed to taxation without representation, as greatly remarked, and they were also, a less celebrated quality, opposed to taxation with representation. 'That a great reluctance to pay taxes existed in all the colonies, there can be no doubt. it was one of the marked characteristics of the American people long after their separation from England."

From Chapter 6: An Instrument of Revolution

Paper Money no Gaurantee of Successful Revolutions

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 75 to 76

"Paper was similary to serve the Soviets in and after the Russian Revolution. By 1920, around 85 per cent of the state budget was being met by the manufacture of paper money. In that year or not long after, a Harvard graduate student in economics visited the Soviet Union. In accordance with counsel of similar adventurers of the time he took in his pockets a pad of toilet paper. On a densely crowded streetcar in Moscow one day he felt the hand of a thief in his hip pocket. He noted with amusement and satisfaction that it was the pocket that contained not his money but the toilet paper. The latter the pick-pocket deftly remove. Only later did the young scholar come to realize that the gentle produce that was stolen was more valuable than the packet of notes in the other pocket. In the aftermath of the Revolution the Soviet Union, like the other Communist states, became a stern defender of stable prices and hard money. But the Russians, no less than the Americans or the French, owe their revolution to paper.

Not that the use of paper money is a guarantee of revolutionary success. In 1913, in the old Spanish town of Chihuahua City, Pancho Villa was carrying out his engaging combination of banditry and social reform. Soldiers were cleaning the streets, land was being given to the peons, children were being put in schools and Villa was printing money by the square yard. This money could bot be exchanged for any better asset. It promised nothing. It was sustained by no residue of prestige or esteem. It was abundant. Its only claim to worth was Panco Villa's signature. He gave this money to whosever seemed to be in need or anyone else who struck his fancy. It did not bring him success, although he did, without question, enjoy a measure of popularity while it lasted. But the United States army pursued him; more orderly men intervened to persuade him to retire to a hacienda in Durango. There, a decade later, when he was suspected by some to be contemplating another foray into banditry, social reform and monetary policy, he was assassinated."

From Chapter 8: The Great Compromise

Money being the first casualty of War

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 101

"Truth has anciently been called the first casualty of war. Money may, in fact, have priority. In the fiscal year ending 30 June 1861, the expenditures of the United States government were $67 million. The following year they were $475 million. They rose steeply in the next years, reaching $1.3 billion (* - 'Billion' used througout with the meaning one thousand million) in 1865, a level not again matched until 1917. Faced with outlays of such magnitude, Salmon Portland Chase rose to the occasion with historic uncertainty of purpose. He warned solmenly against resort to paper money : ' . . no more certainly fatal expedient for impoverishing the masses and discrediting the government of any country can well be devised'. But he revealed also a remarkable, if predictable, reluctance to recommend taxes, and Congress did not outdo him in this regard."

From Chapter 8: The Great Compromise

Confederate Bank Notes

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 104

"All the confederate note issues totalled by the end of the war about a billion dollars; borrowing came to about a third of that amount. Prices rose throughout the war - until March 1864, at a rate of about 10 per cent per month. an index of prices for eastern states of the Confederacy, with the early months of 1861 equalling 100, was at 4284 by December 1864, 9211 the following April when the end came. Wages lagged far behind. While prices were ninety times higher in 1865 than in 1861, wages by one calculation were up only about ten times. Price commissioners sought to arrest the price increases by setting ceiling prices for staples. On occassion, the newspapers printed these prices side by side with those actually being charged. Confederate notes and bonds alike were worthless after Appomattox.

No serious scholar has defended this method of war finance. But neither have they stopped there. 'Northern writers of an economic turn of mind have oftentimes attributed the collaps of the Confederacy to its paper money. . . '

Without question, more and heavier taxes could have been levied. These would have equalized somewhat the burdens of war. The chaos attendant on the gross price increases would have been lessened; the reputation of the confederacy for stability and good sense would have been enhanced and conceivably also the morale of the troops, not to mention that of the workers. But it also remains that a small new country under blockade, severed from its sources of industrial products as well as its markets, fighting mostly on its own territory, sustained a large army - estimates range from 600,000 to an improbable million - in the field for four years. This was a most formidable enterprise. That it did so on aggregate hard-cash resources of around $37 million was, a minimum, a major feat of financial legerdemain. The miracle of the Confederacy, like the miracle of Rome, was not that it fell but that it survived so long. The tale is told of an archaeologist who, ten thousand years hence, in the diggings that were New York, find the remnants of a pay toilet and identifies it purpose. He concludes that civilization failed because something went wrong with the coinage. Those who attribute the collapse of the Confederacy to its paper money are of the same school."

From Chapter 8: The Great Compromise

Wiliam Jennings Bryan, Silver, Gold Standard and the Cross of Gold

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 109

"Misfortune can often be turned to good account if men are sufficiently alert in assigning cause. 1893 provides a good example. The rush for gold assumed the proportions of a panic. The panic had other causes, including as ever the previous speculation. However, the hard-money men and their spokes-man attributed all the balme to silver as did the President, Grover Cleveland. During the summer of 1893, Cleveland called the Congress into special session to lower the lid on silver. Over the elequent opposition of William Jennings Bryan, who was then in the House, and after a long debate in the Senate, the subdued and frightened Congress did so.

The silver men were not yet quite defeated. in 1896, they carried the struggle to the electorate. Bryan, in the view of the hard-money men, 'fatuously insisted upon making the silver question the main issue'. Before the Democratic Convention he issued his immortal challenge, '. . . we will answer their demans for a gold standard by saying to them: You shall not press down upon the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold.' Having previously been advised of the righteiousness of silver, God now learned that gold was implicated, at least symbolicaly, in the death of His son.

In the election Bryan was decisively beaten. Time had worked its usual result. Now the Midwest was for hard money. McKinley won 271 electoral votes to 176. The New York World said: 'Not since the fall of Richmond have patriotic Americans had such cause for rejoicing . . . honor is preserved.'"

From Chapter 9: The Price

The Gilded Age and Hard Money

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 111 to 112

"There can never have been a time when it was as good to be rich as in the late years of the last century, the first decade of the present one. There was no income tax, the Civil War impost having been obliterated soon after the war. There was the rewarding contrast with the vast majority which was still very poor. Writing in 1899, Thorstein Veblen observed that property was then 'the most easily recognized evidence of a reputable degree of success as distinguished from heroic or signal achievement. It therefore becomes the conventional basis of esteem.' With sound instinct, historians refer to these years at the Gilded Age.

They might as accurately be called the age of gold. For some, and perhaps much, of the esteem ascribed by Veblen to wealth was given by the nature of money. If money is weak and wasting in value, even the rich lack something in certainty as to their worth. Their minds, like those of others, leap forward to the day when their money will disintegrated, as did the Continental notes or the reichsmark. They have a strategy for protecting themselves but maybe it will not work, and for what then does money count? No such question arises either in the mind of its possessor or of those who would denigrate him if money is hard and eternal.


The ability of the rich and their acolytes to see social virtue in what serves their interest and convenience and to depict as ridiculous or foolish what doesnot was never better manifested than in the support of gold and their condemnation of paper money. The parallel tendency of economists to find virtue in what the reputable and affluent applaud was similarly evident. But there were also a precision and harmony and a unifying tendency in the operation of the gold standard that commended themselves even to those who were neither consciously nor wittingly servants of the rich. It did make simple and certain the relations between the currencies of different countries and gave the industrial countries and their empires a single money. It was sad that it also had serious, even fatal, flaws, that it could inflict heavy punishment on the ordinary person and, as time passed, also on the affluent themselves. These flaws were especially serious in the context of the compromise that ruled in American monetary affairs."

From Chapter 9: The Price

Redefined definitions: panic, crisis, depression, recession, growth correction

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 113

"Where economic misfortune is concerned, a word on nomenclature is necessary. In the course of his disastrous odyssey Pal Joey, the most inspired of John O'Hara's creations, finds himself singing in a Chicago crib strictly for cakes and coffee. He explains this misfortune by saying that the panic is still on. His term - archaic and thus slightly pretentious - reflects the unfailing O'Hara ear. During the last century and until 1907, the United States had panics. But, by 1907, the language was becoming, like so much else, the servant of economic interest. to minimize the shock to confidence, businessmen and bankers had started to explain that any current economic setback was not realy a panic, only a crisis. They were undeterred by the use of this term in a much more ominious context - that of the ultimate capitalist crisis - by Marx. By the 1920's, however, the word crisis had also aquired the fearsome connotation of the event it described. Accordingly, men offered reassurance by explaining that it was not a crisis, only a depression. A very soft word. Then the Great Depression associated the most frightful of economic misfortunes with that term, and economic semanticists now explained that no depression was in prospect, at most only a recession. In the 1950s, when there was a modest setback, economists and public officials were united in denying that it was a recession - only a sidewise movement or a rolling readjustment. Mr Herbert Stein, the amiable man whose difficult honour it was to serve as the economic voice of Richard Nixon, would have referred to the panic of 1893 as a growth correction"

From Chapter 9: The Price

Politicians and Religion exerting a calming influence on financial panics

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 118

"The panics also brought recourse to two lines of remidial action which have always been much favoured, although with no proof that they have ever been greatly effective. One is to seek to exorcize economic misfortune but affirming it does not exist. In November 1920, a very dark month following the crash of the year before, President Monroe advised the Congress of the 'prosperous and happy' condition of the country, adding that 'it is impossible to behold so gratifying, so glorious a spectacle, without being penetrated to the Supreme Author of All Good for such manifold and inestimable blessings'. The government of the time was known to be deeply concerned over the economic crisis. In March 1837, as the trials of that terrible year were becoming felt, Andrew Jackson said in his farewell address: 'I leave this great people properous and happy.' In June of 1930, Herbert Hoover was visited by a delegation of public-spirited men who urged an expansion of public works to ease the plight of the unemployed, who were then rising into the millions. 'Gentlement,' the President said, 'you have come sixty days too late. The depression is over'. In the sincerity of manner with which they endlessly proclaimed the end of inflation, Mr Nixon and his economists were acting in a tradition that was older than they knew.

The other favoured response is to urge resort to religious solace as a substitute for more expensive action. In 1837, a thoughtful divine urged sufferes to use the bad times to 'Lay up treasure in Heaven', adding helpfully that. 'All this may be done on a small income.' in 1857, another bad year, the Journal of Commerce offered similar counsel in an approximation to verse:

Steal awhile away from Wall Street
and every worldly care,
And spend an hour about mid-day
in humble, hopeful prayer.(14)

In 1878, Archbishop Williams of Boston took the more practical step of circulating an address to his churches asking his people not to react to their fears by going to the banks for their money. That caused runs. In October 1907, as the cumulating step was make to arrest the panic of that year - manifested in heavy runs on the New York trust comapnies and banks - J.P. Morgan, himself high in Episcopalian councilsm called the leading divines of the city to his office and asked them to give encouraging sermons the following Sunday. 'Religious leaders of all denominations agreed to paint cheerful pictures that weekend.'(15) A long history thus introduces the Reverend Dr Peale and the Reverand Dr Graham, the latter-day exponents of the economically useful and socially tranquillizing gospel."

(14) Robert Sobel, Panic on Wall Street (New York: Macmillan Co., 1968) p. 315

(15) Robert Sobel, Panic on Wall Street (New York: Macmillan Co., 1968) p. 315

From Chapter 9: The Price

Effects of Bank Failures

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 121

"The banks, needless to say, provided the money that financed the speculation that in each case preceded the crash. Those buying land, commodities or railroad stocks and bonds came to the banks for loans. As the resulting notes and deposits went into circulation, they paid for the speculative purchases of yet others. It helped that the banks were small and local and thus could beleive what the speculators believed, be caught up in the same euphoric conviction that values would to up for ever. The banking system, as it operated in the last century and after, was well designed to expand the supply of money as speculation required.

Banks and money also contributed to the ensuing crash. A farther constant of all the panics was that banks failed. In the earlier panics the will-of-the-wisp enterprises of the swamps and crossroads disappeared as, in some cases, their creators knew they would. Later in the century, the casualties continued, and still most heavily among the small state banks. In the panic year of 1873 and in 1874, ninety-eight banks suspended, as compared with twenty-nine in the two preceding years. In 1892, there were eighty-three suspensions and 496 in the panic year following. In 1907 and 1908, 246 banks fell. After 1920, the real slaughter began, and, after 1929, it approached euthanasia. In the four years beginning in 1930, more than 9000 banks and bankers hit the dust.

A bank failure is not an ordinary business misadventure. As Professor Friedman has pointed out,(18) it has not one but two adverse effects on economic activity: Owners lose their capital and depositors their deposits, and both therewith lose their ability to purchase things. But failure (or for that matter the fear of failure) also means a shrinkage in the money supply. No mystery attaches to this. A healthy bank is making loans and, in consequence, creating deposits that, in turn, are money. A bank that fears failure is contracting its loans and therewith its deposits. And one that has failed is liquidating its loans, and its frozen deposits are no longer money. The liquidation also draws on the reserves, loans, deposits and thus the money supply of other banks."

(18) Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960, Study by the National Bureau of Economic Research (Princeton: Princeton University Press, 1963), p. 353. While this study has led Professor Friedman to conclusions rather different from those reached here, it is a model of scholarly precision to which, as with everyone concerned with these matters, I am indebted.

From Chapter 10: The Impeccable System

Politicians doing their enemies work

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 133

"No feature of American - to some extent of Anglo-Saxon - politics is so certain as the tendency of politicians to become first the captives, then the agents, of their opposition. In consequence, major initiatives are not taken by those who originally most favour them. Those so captured by an idea are too much in fear of their opponents. The action comes with the opposition accepts the need and wishes to disarm the original proponents. In the 1960s, liberal Democrats in the United States urged peace and international amity but continued the Cold War and plunged the country into Vietnam. They did so partly because they feared being called appeasers and crypto-Communists by the right. Richard Nixon, having impeccable credentials as a Cold Warrior, moved towards peace or accommodation with Moscow and Peking and withdrew, if very gradually, from Vietnam. Thus on foreign policy he outflanked his liberal opposition. When Professor Milton Friedman proposed a guaranteed income for the poor, it was considered (quite correctly) an act of creative imagination. When a Republican administration proposed it to Congress, it was a mark of conservative statemanship. When George McGovern, running for President, advanced a close variant on slightly more generous terms, it was condemned by conservatives as the dream of a fiscal maniac. As known and stalwart defenders of the dollar, the Republicans were able, in the early 1970s, to devalue it not once but twice. For anyone suspected of a more flexible attitude towards the integrity of the dollar, such action would have been exceedingly perilous."

From Chapter 10: The Impeccable System

The Federal Reserve's first crisis (USA)

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 140

"As the new System was getting under way, the United States was moving into war. It is part of the favouring cliche that this was the Federal Reserve's first crisis and that it met it well. This is nonsense. The Reserve Banks bought government bonds and helped sell them as the Treasury required at the interest rates the Treasury specified. Peacetime loans to private individuals can be refused. Government loans in wartime cannot. When its rates are set and its purchases of government securities specified, a central bank has no independent power. the System began its life as a routine adjunct of the Treasury, a role that required no thought."

From Chapter 10: The Impeccable System

Disestablishment of the Regional Federal Reserve Banks (USA)

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 143

"Remarkably, this disestablishment has never been conceded. The twelve district banks and their buildings survive as branch operations. Their mechanical tasks, notably the clearing of cheques, the routine movement of currency and the management of government financial transactions, are useful and vast. But the myth of the autonomy and importance also survives. A pamphlet published in 1971 by the Federal Reserve bank of Richmond, Virginia, the unit that sustains the dignity of the one-time capital of the confederacy, shows the Board of Directors, all nine, deliberating around an adequately solid table in an appropraitely panelled room. One man near the camera wears a sports jacket; otherwise all is in order. However, reluctantly and with indirection, the text concedes the truth. The directors, it is explained, do not establish dividends, control investment policy, supervise operations, as the term might imply. (Nor, though it is not explained, do they appoint officers or fix salaries.). They do 'esablish, subject to the approval of the Board of Governors [of the System], the discount rates the Reserve Bank charge on loans to member banks'. This is a difficult way of saying that the rediscount rate too is exclusively the domain of central authority. In the list of functions of that sombre deliberate body in Virginia, only one remains that is categorical. The Directors of the Federal Reserve Bank of Richmond 'provide System officials with considerable "grass roots" of information on business conditions2. Richmond being only 109 miles from Washington, the roads good, the telephone service excellent and its newspapers readily available if wished, the volume of such information otherwise unavailable in Washington cannot be great. The textbooks, without exception, cooperate to sustain the regional myth. New York may be the financial centre, Washington the capital. But important guidance is given by Kansas City. Perhaps there is something to be said for perpetutating legend, enhancing local pride, even at the expense of truth. But truth and reality have their claims and these are that Aldrich's concession to the countryside was unworkable and has been undone these forty years."

From Chapter 11: The Fall

Rare decisions of US Government Cabinet Officers: WWI US Loans to European Countries

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 148

"In principle, it might be noted, these loans were avialable to both sides. In practice, the British controlled the oceans. Thus they made it impossible for their enemies to move any appreciable quantity of the products the loans would buy, so the Germans and Austrians had no need for the loans that this even-handed policy allowed. In consequence, William Jennings Bryan was led to the last of his many acts of public inconvenience. He held that such loans to the British were inconsistent with any neutrality that was strict, as Wilson had demanded, as to both though and deed. For this aberration he was severely rebuked by those who believe that obvious truth should be subordinate to the demands of patriotism or the prospects of pecuniary gain. to the intense relief of such citizens, Bryan left the Cabinet in June 1915 over Wilson's reaction to the sinking of the Lusitania. He remains one of the tiny handful of cabinet officers in the American experience to register opposition to a policy of which they disapproved by resigning."

From Chapter 11: The Fall

Keynes and WWI

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 149

"For handling problems such as those facing the British or French treasuries during the war, there are not miracle men. Either current earnings from exports, seleable assets, loans or credits of one kind or another or gold exist for paying foreign suppliers, in which case the officials involved are a success. Or these assets do not exist, in which case those involved are a failure. However, nothing comes so easily to the press and public mind as the vision of financial genius. Both wish to believe that, where such important matters are involved, there are individuals of transcendental insight and power, men who can make something out of nothing. In Britain during the war (and after) the popular imagination thus stimulated settled on the thirty-one-year-old (in 1914) Treasury official, John Maynard Keynes. His papers of the period, recently published, suggest that he was a hard-working, competent and resourceful man who matched resources to payments with attention and skill and who extended his mind to the similar problems of the French and the Russians. That was all."

From Chapter 11: The Fall

People after 1914 never seeing a gold coin transaction again

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 149 to 150

"The effect of removing the gold from Europe was to remove from the reserves of French and British banks, the Banque de France and the Bank of England, the metal into which paper could be converted. And by removing the gold from hand-to-hand circulation and replacing it with paper, it also increased greatly the proportion of the money supply that, given convertibility, would be subject to conversion into gold. The primary effect of this on the future of gold standard will be evident. There was much more paper to convert, much less gold with which to do it.

There was, perhaps, a more serious effect. The calling in of the gold was a way of suggesting to the citizens that, as compared with paper or bank deposits, it had a superior significance. Before 1914, people passed on gold coins just as easily as they passed on subsidery silver or paper. Thereafter gold would always seem better - something that might prudently be held. So it came about that gold coins, which before 1914 were received and passed on without notice or thought, were ever after something to be scrutinized, shown, commented upon and retained. Partly for that reason - Gresham again - not many who were born after 1914 would ever receive a gold coin in the normal course of trade of compensation."

From Chapter 11: The Fall

USA domestic funding the First World War done on hard money

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 151

"In 1917, when the United States entered the war, its loans to Britain and France replaced the comscripted gold (and securities) as the means by which these allies paid for their needs. Accordingly, gold ceased to flow to the United States, and instead a small outward flow began to Spain and the other remaining neutrals. This was stopped by law. The United States thus went off the gold standard where international transactions were concerned. It remained possible, although in the minds of many rather unpatriotic, for Americans to trade paper notes and bank deposits for gold so long as the gold was not taken out of the country. The First World War was, domestically speaking, fought on the gold standard. It was - an exceptional things - a hard-money war. More exactly, the inflow of gold provided a vast and elastic net within which almost anything could occur. The decisive question in this, as in other wars, was not what happened to the money; that, as always, was the servant of wartime need. What counted was how funds to pay for the war were raised.


These transactions were conducted by men of grave and courteous manner, good tailoring and considered speech. There was none of the raucous advocacy that marked the issue of the greenbacks. The Civil War and the greenbacks remain the classic manisfestation of irresponsible finance. The First World War has no such reputation. Such as the services of style in economics and money management.

In fact, the First World War legerdemain involved an even more elaborate exercise in illusion. As under Jay Cooke during the Civil War, a legion of volunteer bond salesment was recruited to sell government securities to the public. A commendable aspect of this effort was the three-minute speech - a recognition that exhortatoins on patriotism and public duty are effective in inverse proportion to their length. Such salesmanship has, in principle, some economic justification. Some people may be persuaded to buy bonds instead of spending money. By saving rather than spending, the individual diminishes the pressure on markets, reduces the severity of the inflation. The labour, materials and capital equipment so unbought or unused become available to the government for war purposes. In the First World War, however, buyers of government bonds were encouraged to borrow from the banks for their purchases, using the bonds as collateral. Many did. Again the banks using the bonds so acquired replenished their reserves by borrowing from their Federal Reserve Bank. The immediate effect of this was again indistinguisable, except as it involved even greater indirection, from direct borrowing by the government from the Federal Reserve Banks. After the war people sought to keep their bonds and reply their bank loans. This had the effect of contracting expenditures for current consumption and thus, conceivably, made the post war slump in consumer expenditure marginally worse. In the euphoria of war, not surprisingly, none gave attention to such possible effects. Nor, for that matter, did many wonder why people should be urged to borrow money from their banks to buy bonds which the goverment could as easily have sold to the same banks at less cost."

From Chapter 12: The Ultimate Inflation

Trying to stick to the gold standard

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 156

"The tendency, indeed a principle purpose, of the gold standard was to unite the economic performance and policies of nations. This, during its brief rule, it did.


It had also a notable flaw. That was in asking, in an age of growing nationalism with a growing tendency to hold governments responsible for economic performance, that both nationalistic instinct and domestic economic management be subordinated to an impersonal, international mechanism, one capable of inflicting considerable hardship and distress. It was a flaw that supporters of gold did not accept. They saw any reluctance of governments as inhering in the lack of moral fibre of politicians - a lack that led them to try to ameliorate the streains that gold imposed. That the morality of politicians is difficult to alter in the short run was not recognized."

From Chapter 12: The Ultimate Inflation

Self Inflicted Wounds

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 157

"In the fifteen years following the First World War, and especially in the immediate aftermath, the industrial nations exploted this new freedom in remarkably diverse fashion. The French followed the line of least resistance with, on the whole, the best results. The British followed the line of greatest wounds. The Germans so handled matters, or so yielded to circumstances, as to produce the greatest inflation of modern times. The United States, by a combination of mismanagement and non-management, produced the greatest depression. In all the long history of money the decade of the 1920s - extended by a few years to the consequences - is perhaps the most instructive."

From Chapter 12: The Ultimate Inflation

France Prospering after WWI

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 159 to 161

"As in Britain and Germany, a whole generation of workers had been destroyed by the conflict - in France the losses were greater among the peasants of relevant age than in the industrial proletariat, for the mobilization and death of peasants was less harmful to the economy. There remained to be supported a heavy burden of crippled, mutilated or otherwise dependent men and women. The French had, however, one thing much in their favour. They could set about rebuilding without thought of the cost. It was thier deepest conviction that the Germans both should and would be made to pay. Nor did this follow entirely from the congenital tendency of the French (as the Anglo-Saxons believe) to misapprehend where economics are involved. Fifty years before, the Germans had levied the seemingly massive total of five billion francs on France following the Franco-Prussian War. The French had rallied and paid it off in twenty-four months.

Since the Germans would be paying, it seems appropriate to French post-war governments that they borrow to get the work under day. When the German money came in, the loans could then be discharged. With this understanding French reconstruction proceeded with confidence and exemplary speed.


In the years from 1919 to 1926, France was, in fact, exceedingly prosperous. The devastation, save for irretrievable land such as that around Verdun, was repaired. (The acreage on with the great battles were found was often almost unbelievably small. The Battle of Verdun was found on an area only slightly larger than that of the London Parks.)


Not having price stabilty in the twenties, Frenchmen wanted it greatly. This wish was enhanced by the belief, common in even the most sophisticated circles at the time, that inflation was without redeeming effect on the economy. It was bad and all bad. In these years two leading observers of the French economy reported, with genuine surprise, that 'paradoxically as it may seem, the economic events of post-war France lend themselves to the interpretation that inflation has a stimulating effect on industrial development'.(3) A radical thought.

But while Frenchmen yearned for stable prices, a reliable franc, they yearned very little for the measures, notably the taxes and restraints on borrowing, that would make these possible. An observer earlier in the decade might well have predicted that the franc would follow the mark; it remains something of a puzzle that it did not. However, in 1926, a new ministry of national consolidation headed by Raymond Poincare came to office. It was pledged to save the franc and, in a general way, to the taxes and controls on business borrowing that would do so. Though it soon relented on taxes, people believed it was serious. From this belief and the general well-being of the country as much as from specific action came success. Prices began to level off; soon the franc was stabilized on the foreign exchanges. What had been called the battle of the franc, rather surprisingly, was won. A French historian with some justice called the French policy in these years an island of reason in a sea of errors.(4) The reason consisted in doing what seemed obvious at the moment - and recogniszing, as ever, that the French economy is hard to damage.


France escaped the ultimate inflation. The demands for reparations that led her far along the road did have something to do - mand at the time thought much - with the collapse that then occured in Germany."

(3) W. F. Ogburn and W. Jaffe, The Economic Development of Post-War France (New York: Columbia University Press, 1929). Cited in T. Kemp, The French Economy 1913-1939 (London: Longman Group, 1972), p. 67. This last is a most useful and succinct study.

(4) Alfred Sauvy, Historie Economique de la France entire de Deux Guerres, vol. 1, 1918-31 (Paris: Fayrad, 1965). Cited in Charles P. Kindleberger, The World in Depression 1929-1939 (Berkeley and Los Angelos : University of California Press, 1973P, p. 48. The latter is the best book in English on the Great Depression, and one to which I am much indebted.

From Chapter 12: The Ultimate Inflation

Keynes and the Versailles Treaty

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 164

"The second problem for the Germans was the reparations that had to be paid under the Versailles Treaty. These were in addition to the domestic budget and, in the early post-war years about as great. Keynes's The Economic Consequences of the Peace, perhaps the single most influential tract ever written on a subject of current economic importance, may well have left the world with an exaggerated impression of the unreasonableness of these demands. But the eventual bill, 132 billion gold or pre-war marks (about $33 billion), was large."

From Chapter 12: The Ultimate Inflation

Keynes and almost going bankrupt

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 165

"From the spring of 1920 to the summer of 1921, German prices were, for all practical purposes, stable at about fourteen times the pre-war level. J.M. Keynes was backing his by now widely advertised judgement that the Versailles requirements were far beyond the capacity of the German economy by speculating heavily on the margin against the mark. He narrowly escaped financial ruin, was saved by loans from his publishers and a friendly financier. 'It would have indeed have been a disaster if the man who had so recently set world opinion agog by claiming to know better than the mighty of the land had himself become involved in backrupcy'. Yes, indeed."

From Chapter 12: The Ultimate Inflation

German Hyperinflation: 1923

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 167

"Late in July the Daily Mail man told of this problem:

It is difficult to get a cheque cashed. The 10,000-mark note is the highest denomination printed and the banks are denuded of them. This morning motor-lorries loaded with paper money kept on arriving at the Reichsbank but messengers with handcarts were also there to take away the bundles of notes passed out by the Bank . . The cashier of my bank handed me 4,000,000 marks in 1000-mark notes, each worth less than half a farthing . . He obligingly did them up for me in a neat paper parcel which I afterwards put on the table of the restaurant where I lunched and unpacked when the waiter brought the bill. But this difficulty will soon disapper for we expect to have 4,000,000-mark notes by the end of next week.

In the next weeks there were many such tales. At the end of October the New York Times told of a stranger in one of 'the lesser restaurants' in Berlin who flourished a dollar bill and asked for all the dinner it would buy. He was amply provided, and, as he was about to leave, the waiter arrived with another plate of soup and another entree and bowed politely: 'The dollar has gone up again'."

From Chapter 12: The Ultimate Inflation

Economic woes leading to Fascism or Communism

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 172

"That the great German inflation, like the ones elsewhere in central Europe, produced a large transfer of wealth from those who possessed saving accounts, money, securities or morgages to those who had debts or tangible property is assumed. And, despite a shortage of affirming statistics, that such transfer occurred does seem plausible. The loss so involved, the parallel lost by people of their stake in the social order and the companion anger and frustration were, in turn, thought to have much to do with the rise of Fascism or Communism. These are matters on which there is no proof, and it is unbecoming, however customary, to substitute certainty of statement for hard evidence. But the simple facts are worth a glance. All of the countries of central Europe that suffered a collapse of their currencies following the First World War were eventually to experience Fascism, Communism or in most cases - Poland, Hungary, East Germany - both. The countries that did not experience such a breakdown in their money were almost uniformly more fortunate.

What is not in doubt is that the German inflation left Germans with a searing fear of its recurrence. And whatever the effect of inflation in paving the way for Fascism, measures taken later out of fear of inflation were certainly not without effect. We have noticed, and will see again, that the strongest action is taken against inflation when it is least needed. On 8 December 1931, with one-sixth of the total German labour force out of work, the government of Heinrich Bruning decreed a reduction of from 10 to 15 per cent in most wages, this being a rollback to the level of four years earlier. It decreed also a reduction in industrial prices of 10 per cent, a similar reduction in rents, railway fares, rail freight charges and charges for municipal services. Earlier, wages of public employees had been reduced by a fifth, and taxes on wages, salaries and on incomes had been sharply increased. Unemployment benefits were also reduced. In the following year unemployment rose to one-fifth of the German labour force, and in the next year came Hitler (16,17)"

17. Later in the thirties, Bruning joined the Harvard faculty as Professor of Government. At a welcoming seminar one evening I asked him if his Draconian measures at a time of general deflation had not advanced the cause of Adolf Hitler. He said they had not. When unwisely, I pressed the point, he asked me if I disputed the word of the former Chancellor of the German Reich.

From Chapter 13: The Self-Inflicted Wounds

1925: "Feather-brained" Churchill puts Britain back on the Gold Standard

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 174 to 178

(Refer: Text of Winston Churchill's 28th April 1925 budget speech as Chancellor of the Exchequer to the House of Commons - that put England back on the Gold Standard

"As France chose the line of least resistance in the decade of great monetary dispersion, so Britain chose that of the greatest. The French experience was better, although this is not proof of superior wisdom. France, as we have seen, has a tendency to rise above all misfortune. Britain, with her heavy dependence on external trade, is a difficult country to manage. British economic policy, accordingly, needs to be better than that of most other countries, and what is often taken to be poor British performance reflects, in fact, the far greater difficulty of the British task. However, in the decade of the twenties, the British, after considerable thought and discussion, did what made things worse.

In Britain, as elsewhere, prices receded in 1920 and 1921 as the wartime shortages were overcome, the budget was brought back under control and the boom came to an end. Unemployment, which of course had been negligible in the preceding years, rose to 12.6 per cent of the labour force in 1921. It averaged above 10 per cent the following year. Thereafter it fell, prices firmed or rose, as did also wages. All seemed on the way back to normal or what, following President Harding's great solecism, Americans were then calling normalcy. (After President Nixon's departure in 1974, one lexicographer spoke of a return to normality.) In 1925, the decision was taken to return to the gold standard.

This was a less remarkable decision than much subsequent discussion has made it out to be. In the greatest days of Britain, sterling and gold were interchangeable, and the one was not thought inferior to the other. For a nation bent on retaining its past eminence, economic and otherwise, to re-establish this identity was a natural step. None was more open to the thought of these past glories than the then Chancellor of the Exchequer, Winston Churchill, for whom the past was part of life itself and also a rich source of family prestige and personal income. His address to Parliament on 28 April 1925 announcing the return to gold was a Churchillian occasion. The self-governing dominions, he observed, had moved or were moving to re-establish the gold standard, so over the whole of the British Empire there would be 'complete unity of action'. The success of the step was being ensured by American support - $200 million from the Federal Reserve Bank of New York, $100 million from J. P. Morgan. The consequence would be a great revival in international and intra-imperial trade. Hence-forth nations united by the gold standard would 'vary together, like ships in harbour whose gangways are joined and who rise and fall together with the tide'. As a minor defect, gold could be had only for export. There would be no more gold coins. The New York Times reported next day that, according to opinion expressed in the lobby', the Chancellor's speeech was one of the 'finest in a long line' and 'fully up to his own high reputation as a parliamentary orator'. Its headline said that Churchill's proposals had carried 'PARLIAMENT AND NATION TO HEIGHTS OF ENTHUSIASM'.(1) Sixteen years later Churchill would be well cast; no man was so well equipped to make the lion roar. In 1925, both he and oratory were, without doubt, a misfortune.

The error they defended was in restoring the pound to its pre-war gold content of 123.27 grains of fine gold, its old exchange rate of $4.87. In 1920, the pound had fallen to as low as $3.40 in gold-based dollars. Though it had since gained and was still gaining, the pre-war gold content and dollar exchange rates were far too high. That was because, for these rates, British prices were far too high. Because of this high British prices anyone possessed of gold or dollars could do better by exchanging them for the money of one of Britain's competitors and buying there. And Englishmen likewise could do better by exchanging pounds for dollars, gold or other currencies at the favourable Churchillian rate and buying abroad. in 1925, the price advantage in doing so was about 10 per cent. Exports, as always, were essential for Britain. So, other things equal, British coal, textiles and other manufactured toods could only become competitive at the new exchange rates if their prices were to come down by approximately 10 per cent. A very uncomfortable process.

The case of coal was especially disagreeable, for the pits, still in private hands, were poorly equipped, often indiferently managed and manned by an ill-used, angry and highly intelligent labour force. Lower prices for coal would require lower wages. Agreeing that there would be problems in the coal industry, Churchill attributed these difficulties to the poor condition of the business. In a bold substitution of metaphor for thought he averred that the exchange rate had no more to do with the troubles of coal than with the Gulf Stream. Keynes promptly described this assertion as of 'the feather-brained order'.(2)

Although others had doubts - including Reginald McKenna, the Chairman of the Midland Bank and former Chancellor of the exchequer, who was brought on board the gold policy only with difficulty - the case against Churchill was led by Keynes. It was a simple one.(3) By returning to gold at the old parity, Britain accepted the need for a painful depression of prices and wages with accompanying stagnation and unemployment, all of which would be a rich source of social stress. But Keynes made his case with compassion. He was anxious to discover why Churchill, a man of considerable reputation, was impelled to do 'such a silly thing'. And, after a fashion, he exculpated him. Churchill, Keynes explained, had 'no instinctive judgement to prevent him from making mistakes'. And 'lacking this instinctive judgement, he was deafened by the clamorous voices of conventional finance; and, most of all . . he was mislead by his experts'.(4) The quality of mercy can some-times be a trifle strained.

Keynes was not, in fact, forgiven for his compassion, and later events made him even less eligible for absolution, for men of reputation naturally see the person who has been right as a threat to their own eminence. In the next four years prices in Britain remained under pressure and unemployment remained high - from 7 to more than 9 per cent of the labour force. It was a British trademark. In these years Samuel Dodsworth, Sinclair Lewis's retired motor magnate, came to England. He wanted to see, along with Westminster Abbey, the Lacashire textile workers on the dole.

It is not easy, half a century later, to imagine a time when organized workers could be advised forthrightly of a wage reduction. It was not entirely possible in 1926. When the miners were advised that their wages would be reduced as the monetary policy required, they, not surprisingly, prepared to strike. The owners anticipated the action with a lockout. In support of the miners came the general strike. The general strike did not last very long and, in the manner of many British misfortunes, was enjoyed by much of the population. Among those taking a rewarding stand for law, order and constitutional government and against the tyranny of the mob was Winston Churchill. Still the Gulf Stream. But the miner's strike lasted through 1926 before it was finally defeated. All during the twenties exports remained sluggish, the gold position of the Bank of England remained perilous, and further support had to be solicited from the United States.

Keynes was still under a cloud for his defection on the Versailles Treaty, although by now it was also conceded that his position on this mad much merit. Now for his foresight he was required to content himself with heading an insurance company, writing, cultivating the arts, teaching in a somewhat casual way and speculating ardently on his own behalf and that of King's College, Cambridge, of which he became the bursar. Not until the Second World War did matters become sufficiently serious to allow of his readmission to the Establishment. Churchill, on the other hand, fared better. The convention that makes monetary misjudgement merely interesting error operated even in his uniquely obvious case. That he had made a mistake all came to agree. But it had none of the adverse effects on his career of his earlier and possibly more defensible stand on behalf of the campaign at the Dardanelles.

By 1930, unemployment was falling, output increasing, though both still at a modest rate. The gold position of the Bank of England was still thin. Then came the American crash and slump. In consequence at least in part of the adversity that followed the 1925 decision, Britain now had a Labour government. It was not greatly more immune than its predecessors to the clamorous voices of orthodox finance. On 23 August 1931 Ramsay MacDonald was advised that hoped-for loan from an American bank consortium would most likely be possible, assuming that proposed budget cuts, including a cut to the dole, received Cabinet and public support. A Cabinet minority then proved recalcitrant. So MacDonald resigned and formed a coalition ministry with Liberals and Tories. In September the obligation to pay gold under the Gold Standard Act was suspended.

In a sense, Churchill had triumped. Aided by the inferiority complex of socialists in such matters, his 1925 action had destroyed all threat from the left for another fifteen years. The 1925 return to gold standard was perhaps the most decisively damaging action involving money in modern times."

(1) New York Times, 29 April 1925.

(2) John Maynard Keynes, Essays in Persuasion (New York: Harcourt Brace and Co., 1932), p. 246.

(3) Although not even Keynes made it with complete foresight. Before the return to gold, Keynes thought, for a time, such a return would cause American prices to rise with possible inflationary consequences. and his case was solely against returning to gold; neither he nor others urged the simple solution of reducing the gold and dollar value of the pound. That was rejected as one would reject the removal of Stonehenge. On the antecedent discussions see Charles P. Kindleberger, The World in Depression 1929-1939 (Berkeley and Los Angelos: Univesity of California Press, 1973), p. 43 et seq.

(4) These quotations are from Keynes, pp. 246,248-9.

From Chapter 13: The Self-Inflicted Wounds

USA 1921, the 8 fat years that were not fat for everyone

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 181 to 182

"The first test, then of the new American monetary arrangements was not ambiguous. There was no improvement on the experience of the nineteenth century. Now a much more severe test was put in train. Those who arrange life for men of financial reputation and eminence are not favourable to rest.

Following the depression of 1921 came the eight fat years. These were not fat for all. Farmers were disgruntled and articulate. Workers whose unions had been effectively broken by and during the 1921 slump; blacks and other minorities; women, needless to say - were all voiceless, and none could tell the extent of their dissatisfaction.

What is certain is that beneath the pleasant facade there were flaws. Wages and prices from 1922 to 1929 were almost stable. Since both output and productivity were expanding (output per worker in manufacturing in the twenties increased by an estimated 43 per cent), this meant that profits were increasing. Net income for a sample of 84 large manufacturing firms nearly tripled between 1922 and 1929; their dividend payments doubled. Assisted by successive reductions in the income tax, this meant that the share of income going to the afluent for consumption and investment greatly increased. This income had to be spent or invested. Were anything to interrupt this consumption or investment, there would be a failure of demand - and trouble."

From Chapter 13: The Self-Inflicted Wounds

1920's Stock Market Speculation

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 183

"As before, inviduals and institutions, notably the new investment funds, were buying because they expected the price to go up. Their buying caused prices to go up, caused their expectations to be realized and fostered new and yet greater expectations and the resulting rush to buy. This rush, let it be said one more, would last until the supply of new buyers that affirmed the expectations ran out or something happened to reverse the expectations. When this happened, as following the collapse of foreign lending or the failure of the big holding-company structures, investors could be expected to yield to their fears. Both investment and consumer expenditures would fall.

In financing the sale of bad securities and in nourishing the stock market speculation, a leading part was played in these years by the new monetary system."

From Chapter 13: The Self-Inflicted Wounds

Assisting the 1920's Bull Market - and the fame of failure

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 185 to 186

"The reserves of the commercial banks was replenished in the next few months by open-market operations - by the purchase by the Federal Reserve Banks of $340 million in government securities. This, according to the common view (one still largely accepted), was the error that led to the great stock market speculation. At the moment when restraint was called for, the foreigners had persuaded the American authorities to be liberal for their benefit but at American expense. Adolph C. Miller, a member of the Federal Reserve Board who had disapproved, later described this action as 'the greatest and boldest operation ever undertaken by the Federal Reserve System, and . . . [it] resulted in one of the most costly errors committed by it or any other banking system in the last 75 years!(15) Professor Lionel Robbins of the London School of Economics, a highly prestigious observer of these events, later said: 'From that date, according to all evidence, the situation got completely out of control.'(16)

In the American financial pantheon, along with Hamilton, Biddle, Jay Cooke and Salmon P. Chase, a more than minor niche is reserved for Benjamin Strong. More than any other American of his time he was thought to meet the sophisticated financiers from the Old World on their own terms.(17) Nothing is more interesting than that the transaction with which is name is principally associated in this concession to Montagu Norman and Hjalmar Schacht. Such are the sources of fame. Not that they are peculiar to economics. Except for the Watergate scandal H. R. Halderman and John Dean III would not have made the history books. Nor would Gordon Liddy. John Mitchell would have been a minor footnote. Both John Foster Dulles and Dean Rusk were distinguished by the magnitude of their mistakes in foreign policy. Save that he was associated with the worst-conducted war since that of 1812, no one would ever have heard of William C. Westmoreland. If all else fails, immortality can always be assured by adequate error.

In fact, there was a certain logic on Governor Strong's side - those who celebrate his historic mistake have over-simplified matters. The circumstances are again instructive.


From Chapter 14: When the Money Stopped

The effects of the Great on people's behavour

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 194

"There is a case that, for its effects on the anxieties of people and in consequence of their behaviour, the Great Depression in the most important event in the century so far - at least for Americans. Neither of the two wars had a similar effect on so many; the release of atomic energy, while it may have induced some added measure of caution among the pathologically belligerent, was of yet less consequence. The journeys to the moon were a detail in comparison. Few who lived through the Great Depression were unchanged by the experience."

From Chapter 14: When the Money Stopped

Why the lack of effective action after the 1929 crash?

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 197

"In the 1930's, the vivid recent experience of economists, financial experts, bankers and politicians was with inflation. A mere fifteen years before, during the First World War, prices had doubled. The reaction was deeply advers. And only a decade earlier in Germany and eastern Europe, prices had run away, money had become worthless. In the twenties and thirties, also, there was the great migration of economists from Austria, Germany and central Europe to England and the United States. Add had had first-hand experience of hyper-inflation. In normal consequences, then, the reputable warnings in these years of extreme deflation were of the grave danger of inflation. The perception of this non-existent danger was expecially sharp in the Federal Reserve Banks; these, above all, were the approved centres of the conventional financial wisdom.(3) This perception kept the Federal Reserve System from easing more adequately the position of the increasingly beset commercial banks.

Although the fear of inflation was the most important force immobilizing the financial mind, two other factors were strongly at work in these years. One was the purgative conception of economic policy. This held that the boom built damaging, though often unspecified, distortions into the economic system. Recovery could only come as these were eliminated. Deflation and bankruptcy were the natural correctives. Joseph Schumpeter, his country's Finance Minister during much of the Austrian inflation, was now emerging as a major figure on the American economic scene. He argued that the economic system had, through depression, to expel its own poisons. Looking at the history of business cycles, he concluded that no recovery was ever permanent until this happened and that any public intervention to speed recovery merely postponed the therapy and therewith the recovery. Lionel Robbins, as noted the most admired voice of British orthodoxy, offered essentially the same advice in the most famour book on the Depression: 'Nobody wishes for bankruptcies. Nobody likes liquidation as much . . . [But] when the extent of mal-investment and over-indebtedness has passed a certain limit, measures which postpone liquidation only tend to make matters worse.'(5) A rather cruder formulation came from the Secretary of the Treasury Andrew Mellon. To promote recovery, he advised, the country needed to 'liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate'.(6)

Finally there was the business confidence syndrome. This, a powerful thing at the time, of which traces still remain, held that the views of bankers and business man had to be respected even when they were wrong and positively inimical to recovery. For if action were taken in opposition to these views, business confidence must be impaired. Impaired confidence would mean reduced investment, reduced output, reduced employment and worsened depression. It followed therefore that the right steps, if taken in opposition to the views of businessmen and the financial community, would be the wrong steps. Since the more reputable bankers and businessmen feared action by the government to provide relief for the indigent, employ the unemployed and otherwise expand demand, the confidence syndrome powerfully favoured inaction.

Herbert Hoover was deeply committed to the confidence syndrome and, to the end, sought to convert his successor. Writing to Roosevelt in early 1933, he expressed his conviction that 'a very early statement by you upon two or three policies of your Administration would serve greatly to restore confidence and cause a resumption of the march of recovery'. Among the promises that he thought would do most for confidence would be that of a balanced budget with all that implied as regards spending for relief and employment and 'no tampering or inflation of the currency'.(7)"

(7) Arthur M. Schlesinger, Jr, The Crisis of the Old Order (Boston; Houghton Mifflin Co., 1957), p. 476.

From Chapter 14: When the Money Stopped

The US Depression shutdown of the banking system

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 205

"The remedy that now occurred to the authorities, as the runs became pandemic, was to close up all the banks in the community before their depositors closed them up anyway. At the end of October 1932, all the Nevada banks were thus placed on vacation. In early February 1933, word came that the Hibernia Bank and Trust Company of New Orleans was in bad shape. To provide a plausible excuse while the bank won time to go to the R.F.C., Governor Huey P. Long considered proclaiming a holiday in honour of Jean Laffite, the distinguished pirate. He was dissuaded and, in a thoughtful gesture, commemorated instead the breaking of diplomatic relations with Germany sixteen years before. A fortnight later the storm hit Michigan. One of the two bank-holding companies that did much of the banking in the state, the Union Guardian Trust, was in deep trouble and pleading with the R.F.C. for help. James Couzens, the liberal Republican who, more than Ford himself, made Henry Ford, saw no reason to use taxpayers' money to bail out a badly managed bank in his home state or anywhere else. Nor did henry Ford. He was asked, as the largest individual depositor, to subordinate his claims to a rescue loan. It was a public duty. Ford felt no such duty. So all the Michigan banks had to be closed. In other states people heard the news and started en masse for their money. More holidays were proclaimed. Three weeks later when Roosevelt was inaugerated, only the banks in the Northeast were still doing business. On 6 March 1933, by Executive Order deriving its authority from the Trading with the Enemy Act of the First World War, the holiday was made nationwide. In previous weeks citizens had been supplying themselves with cash in a precautionary way - in February the currency in circulation rose from $5.7 billion to $6.7 billion. This money was a trifle, however, as compared with the more than $30 billion of deposits now unavailable in the vacationing commercial banks.

In 1923, Germany had had so much money that it was worthless. Now ten years later in the United States there was almost none. Clearly there was something still to be learned about the management of money.

In Germany early in 1933, Adolf Hitler came to power. Much of his success must be attributed to the massive unemployment and the deeply painful contraction in wages, salaries, prices and property values following on Bruning's manic defence of the mark. In the United States in March, Roosevelt came to power. His predecessor had been unseated from the Presidency, unusual after only one term, because he, his advisers and his central bank had been for so long immobilized by the fear of inflation. Whatever the importance of money, none could doubt the important of the fears it engendered.

The banks did not remain closed long enough to reveal how a modern economy might function - or fail to function - without money. Those who were known to have jobs or assets were given goods against a later promise to pay. Those who had had neither jobs nor money were given no such help. But they had had neither money nor help before the banks closed. The economy operated during these days at a very low lever. But it had been operating at a very low level before the bank holiday began. There was certainly more deprivation and more suffering in the United States when the money stopped than in Germany when it flooded into worthlessness. But both experiences lingered long in the national memories."

From Chapter 14: When the Money Stopped

The creation of the USA Federal Deposit Insurance Corporation

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 208

"In the baning legislation passed in 1933, there was one provision that was opposed by conservatives and the new Administration alike. This was written by Representative Henry B. Steagall of Alabama, who had a reputation for eccentricity, even crankiness, where money was concerned, and by Senator Arthur Vandenberg of Michigan; it provided for the insurance of bank deposits. A special corporation, the Federal Deposit Insurance Corporation, would be chartered and capitalized by the Treasury and the Federal Reserve Banks. Insurance would be available to the depositors of all banks - state or national, members or non-members of the Federal Reserve - which chose to join. The dangers of the proposal were evident to all. The best banks would now have to accept responsibility for the recklessness of the worst. The worse, knowing that someone else would have to pay, would have a licence for reckless behaviour that the supervision authorized by the legislation could not hope to restrain. The American Bankers Association led the fight against the plan 'to the last ditch', holding it to be 'unsound, unscientific, unjust and dangerous' (17) as well as otherwise unsatisfactory. Perhaps it would even mean a return to the wildest days of wildcat banking.

In all American monetary history no legislative action brought such a change as this. Not since, to this writing, have the lines formed outside one bank and then spread inelcutably to the others in a town. Almost never have the lines formed at all. Nor was there reason why they should. A government insurance fund was now back of the depositors; no matter what happened to the bank, the depositors would get theirs. And since the insuring agency, the Federal Deposite Insurance Corporation, had to pay for recklessness, it had an iron-clad reason for the supervision and intervention that would preclude recklessness. In a further sense the F.D.I.C was what the Federal Reserve had not succeeded in being - and utterly reliable lender of last resort, one that would immediately and without cavil come forward with whatever money was needed to cover the insured deposites. In 1933, 4004 banks failed or were found unfit to reopen after the bank holiday. In 1934, falues fell to sixty-two, only nine of which were insured. Eleven years later, in 1945, failures in all of the United States were down to one. The anarchy of uncontrolled banking had been brought to an end not by the Federal Reserve System but by the obscure, unprestigious, unwanted Federal Deposit Insurance Corporation."

From Chapter 15: The Threat of the Impossible

To Inflation or not to inflation

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 211

"From the earliest days the lines were drawn on the question of inflation not only outside but also within the new Administration. No one of any importance in the Administration was willing to describe himself as an inflationist. An American politician can yearn for freedom from dull marital ties. he does not wish to be a proclaimed adulterer. So with inflation."

From Chapter 15: The Threat of the Impossible

The 1933 London Economic Conference

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 215

"Of the numerous delegations the Americans had some claim to being not only the most colourful but also the most confused, and, as the conference proceeded, the members also developed a total and wel justified dislike for each other. However, the British delegates, led by Ramsay MacDonald, was deeply unclear as to whether it was a defender of gold, as seemed proper, or of an inconvertible pound at a rate of exchange with other countries that did not again punish British exports. It was only that being British, as someone said, their confusion was better organized. in the months before the conference American Political opinion had become firmly insistent that the British, French and lesser Allied powers pay their wartime debts to the United States. The Allies, now without hope of collecting first from the Germans, as firmly refused. Were this subject mentioned, it would, it was feared, pre-empt the conference. It was agreed, accordingly, that it would not be discussed at London. Ramsay MacDonald, as Schlesinger tells with much pleasure, 'briskly launched the business proceedings on a note of bad faith by calling in his opening address for a reduction of war debts'. (5) His associates then explained his aberration by his advanced mental and physical deterioration."

From Chapter 15: The Threat of the Impossible

"President Roosevelt is Magnificently Right" - President Roosevelt goes against Monetary Stabilization

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 217

"Thus had Roosevelt's position changed. And thus was it proclaimed. The immediate, most publicized but in many ways the least important effect was on the conference. Its principle purpose, an agreement on stabilization, ceased to exist. It continued on but mostly for the purpose of saving face. (Roosevelt's repudiation also marked, effectively, the end of Raymond Moley's public career - yet another example of the ruthlessness with which money destroys public men.) The reaction of the numerous of the sound money men to Roosevelt was in language that the late Joe McCarthy might have thought harsh. The Manchester Guardian, in a typical comment; called Roosevelt's message a 'Manifesto of Anarchy'.(7) The New York Times was more restrained; mouthing its words with exceptional care, it said that the message was 'of a nature to intensity bewilderment'. Ramsay MacDonald was distraught and incoherent but took some comfort in the fact that King George had expressed outrage at the gried Roosevelt had caused him. More important that the reaction was the effect on the Roosevelt Administration. In the next few months the principal defenders of sound money - Douglas, Acheson, Warburg - all departed the Administration.

But there were notable voices of approval. Faithful to the principles of a lifetime, Baruch now moved fearlessly to the winning side. Before there could be stabilization, he told Roosevelt, each nation must put its house in order 'by the same Herculean efforts that you are now performing'.(9) Another man of flexible mind, or anyhow not disposed to make the same mistake twice, was Winston Churchill. Now out of office, the boats moored together on the golden tide forgotten, Churchill said it was wrong to tie prices to the 'rarity or abundance of any commodity [such as gold]' and 'quite beyond human comprehension' that this should be done out of love for France.(10) In Germany, Konstantin von Neurath spoke of Roosevelt's 'fearlessness', and Hjalmar Schacht was even more helpful in a certain way. He told the Volkische Beobackter, the voice of National Socialism, that F.D.R. had adopted the philosophy of Hitler and Mussolini. Walter Lippmann, a more acceptable observer, also approved.


Even stronger words of approval came from an even more important voice - on economic matters the most important of the decade and most would say the age. Writing in the Daily Mail, John Maynard Keynes congratulated Roosevelt enthusiastically on his stand. The headline, often to be quoted in the years ahead, was: PRESIDENT ROOSEVELT IS MAGNIFICENTLY RIGHT. Not just right but magnificently right.

Most economists would now agree in giving first place to J. M. Keynes and second to Irving Fisher for their contributions to monetary thought and policy in this century. All, regardless of predilection, would give first and second place to one or the other. Nothing better illustrates the changes in attitudes than then contemporary reaction to their applause. The New York Times thought that it 'should hardly be necessary to say' that the ideas of Fisher and Keynes 'have been long before the public, and that both have been rejected by the large concensus of economic and financial judgement.

Fisher, and in lesser measure Keynes, shared with the large consensus of economic and financial judgement the belief that higher prices and associated expansion of production could be rather easily achieved. With Roosevelt they did not know how difficult that would be to accomplish - how hard it was to be magnificently right or even right. That discovery was now to be made."

From Chapter 15: The Coming of J. M. Keynes

J. M. Keynes

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 228

"In 1935, at the age of fifty-two, John Maynard Keynes might well have been considered at the peak of a reasonably remarkable career. His views of Versailles Treaty had been vindicated, although they had also encouraged the Germans in resisting the reparations which had helped the vindication. he had assuredly been right on Churchill and the return to gold. In 1930, he had published what he had intended as his masterwork, the two volumes A Treatise on Money. Tall, angular, arrogant, very English, he was very much a figure in the London intellectual world.

In fact, most of his reputation was still to be made, a circumstance of which he was wholly aware. Writing to George Bernard Shaw on New Year's Day 1935, he said; 'To understand my state of mind, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionize - not, I supose, at once but in the course of the next ten years - the way the world thinks about economic problems.' So it developed.

What made the book, and Keynes's further reputation, was his instinct that there were forces in the modern economy that were frustrating the most important assumptions made by men of orthodox mind - the assumptions that, left to itself and given time, the economic system would find its equilibrium with all or nearly all of its willing workers employed. More than the orthodox views were involved. Were Keynes's instincts right, the hopes of monetary radicals would also be destroyed. A change in the gold content of the dollar or an increase in banks' reserves would not mean more borrowers, more deposits, more money and a surge of the economy back to full employment. The level of trade might be indifferent to the supply of money. The loans might be available in the banks; the returns from borrowing, given the natural tendency of the economy to low performance and unemployment, might be such that no one would want to borrow. It followed, as the failures of the gold-buying policy and open-market operations were beginning in themid thirties to suggest, that monetary policy would not work. It was essentially passive to permissive. What was needed was a policy that increased the supply of money available for use and then ensure its use. Then the state of trade would have to improve.

The conclusion as to the proper policy was one to whichh Keynes came well before he got around to its theorectical justification. In the late twenties he helped persuade Lloyd George, in the latter's last effort as a come-back, to support a major programme of borrowing for public works to cure unemployment. The borrowing created the money; its use for public works ensured its expenditure and the effect on production. And at the end of 1933, as the American gold-buying programme was negating both the hopes of its supporters and the fears of its opponents, he urged the same course on Roosevelt. 'I lay overwhelming emphasis on the increase of national purchasing power resulting from government expenditure which is financed by loans.' The New Dealers should not content themselves with making funds available to be borrowed and spent; they must borrow and spend. Nothing could be lef to hope or chance.

The theoretical justification came in the book Keynes mentioned to Shaw, The General Theory of Employment Interest and Money, published in Britain in February 1936, and in the United States a few months later. Keynes had long been suspect among his colleagues for the clarity of his writing and thought, the two often going together. In The General Theory he redeemed his academic reputation. It is a work of profound obscurity, badly written and prematurely published. All economists have claimed to have read it. Only a few have. The rest feel a secret guilt that they never will. Some of its influence derived from its being extensively incomprehensible. Other scholars were needed to contrue its meaning, restate it propositions in intelligible form. Those how initially performed this task - Joan Robinson in England, Alvin Hansen and Seymour Harris at Harvad - then became highly effective evangelists for the ideas."

From Chapter 15: The Coming of J. M. Keynes

J. M. Keynes destroys Say's Law of economics

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 231

"Until Keynes, Say's law had ruled in economics for more than a century. And the rule was no casual thing; to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots. Until late in the thirties no candidate for a Ph.D. at a major American university who spoke seriously of a shortage of purchasing power as a cause of depression could be passed. He was a man who saw only the surface of things, was unworthy of the company of scholars. Say's law stands as the most distinguished example of the stability of economic ideas, including when they are wrong.


This was the doctrine, perhaps more accurately the theology, that Keynes brought to an end. There are numerous points of entry on his argument; perhaps the easiest is by the way of rate of interest. Interest, he held, was not the price people were paid to save. Rather it was what they got for keeping their assets in plant, machinery or similarly unliquid forms of investment - in his language, what was paid to overcome their liquidity preference. Accordingly, a fall in interest rates might not discourage savings, encourage investment, ensure that all savings would be used. It might cause investors to retreat into cash or its equivalent. So interest rates no longer came to the support of Say's law to ensure that savings would be spent.' And if Say's law was no longer a reliable axiom of life, the notion of a shortage of purchasing power could no longer be excluded from calculation. It might, among other things, be the consequence of a reduction in wages.(5)"

(5) This is a complex point in Keynes. For a full discussion (and much else that is important in Keynes). see Robert Lekachman's admirable The Age of Keynes (New York: Random House, 1966).

From Chapter 15: The Coming of J. M. Keynes

J. M. Keynes and effects of Unions

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 234

"The rise of the trade union also made hash of the orthodox hope that wage reductions would serve as a stabilizing influence, act to correct unemployment. Whatever the merits wage reductions to increase employment, they would not so serve if they did not occur. And one of the first purposes of a union was to resist such reductions. The adjustment in money wages that Keynes thought of dubious corrective value was something that was increasingly less likely to occur. But the unemployment which was now the alternative to wage reductions could have an even greater effect in reducing aggregate demand than the adjustment Keynes did discuss.(11)"

(11) Again an ambiguous point in Keynes. He did foresee efforst by unions to maintain wages.

From Chapter 15: The Coming of J. M. Keynes

People predating J. M. Keynes

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 235

"A disputed question concerning the Keynesian Revolution had long been how much credit should accrue exclusively to its namesake. Many Scholars have argued that more attention should be given to his numerous precursors; that, in fact, their preparations of the ground went far to explain the acceptance of Keynes. These scholars have a point.

A century earlier Malthus had argued the case for a general deficiency in demand. And a generation before Keynes, J. A. Hobsom had developed the caes that economic crises were caused by over-saving. (So great was his heresy that in 1899 he was not allowed to teach it even to consenting adults. '. . . in appearing to question the virtue of unlimited thrift I had committed the unpardonable sin.'(13))"

For some years before the pulication of The General Theory innovative and highly responsible economists in Sweden had been developing and, in degree, applying the same ideas. To them belongs specifically the notion that the budget of the national government should be based on revenues accruing at full employment and that it should not be reduced as expenditures fall during depression. This, in elementary form, is the idea that, in more recent times, had been called the full-employment budget.


Finally, as early as 1933, Irving Fisher had proposed feeding borrowed funds directly into private payrolls; he urged F.D.R. to have the government borrow money and lend it to private employers without interest, two dollars per day for 100 days for each man they added to the payroll. This too would ensure the expenditure. Other plans were in circulation for paying people money for services, pensions or simply because they existed. These had the further provisions that the currency, if not spent within a decent period of time, would become worthless. Thus also would spending be enforced."

(13) Hobson told of this in 'Confessions of an economic heretic', an address delivered in London in 1935. Cited in Keynes, The General Theory., p. 366.

From Chapter 15: The Coming of J. M. Keynes

The Economic Policies of Hitler

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 237

"By the mid thirties there was also in existence an advanced demonstration of the Keynesian system. This was the economic policy of Adolf Hitler and the Third Reich. It involved large-scale borrowing for public expenditures, and at first this was principally for civilian works - railroads, canals and the Autobahnen. The result was a far more effective attack on unemployment than in any other industrial city. By 1935, German unemployment was minimal. 'Hitler had already found how to cure unemployment before Keynes was finished explaining why it occurred.(17) In 1936, as prices and wages came under upward pressure, Hitler took the further step of combining an expansive employment policy with comprehensive price controls.

The Nazi economic policy, it should be noted, was an ad hoc response to what seemed over-riding circumstance. The unemployment position was desparate. So money was borrowed and people put to work. When rising wages and prices threatened stability, a price ceiling was imposed. Although there had been much discussion of such policy in pre-Hitler Germany, it seems doubtful if it was highly influential. Hitler and his cohorts were not a bookish log. Nevertheless the elimination of unemployment in Germany during the Great Depression without inflation - and with initial reliance on essentially civilian activities - was a signal accomplishment. It has rarely been praised and not much remarked. The notion that Hitler could do no good extends to his economics as it does, more plausibly, to all else."

(17) Joan Robinson. Quoted by Garvey.

From Chapter 15: The Coming of J. M. Keynes

Keynesian Economics in Washington D.C. in the Thirties

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 243


"Thus were Keynesian ideas brought to bear in the second half of the thirties. It was on Washington rather than on London that they had their first impact. On the whole, however, it was more on thought and hope than on practical policy. Arrayed against the Keynesian ideas in a stout phalanx were all the practical men. When not able to grasp an idea, practical men take refuge in the innate superiority of common sense. Common sense is another term for what has always been believed."

From Chapter 15: The Coming of J. M. Keynes

Keynesian Economics: The falicy of extending family economics to that of the state

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 244

"An engaging plusible mode of thought, the fallacy of composition extends the economics of the family to that of the government. A family cannot indefinitely spend beyond its income. So neither can a government. A parent who borrows to live leaves debts, not a competence, to shoe who come after. A government that borrows does the same. Both are morally deficient.

The comparison between family and state, on second thought, is implausible. That anything so massive, diverse, complex, incomprehensible as the United States government (or any national government) should be subject to the same rules and constraints as a wage-earner's household is a mtter that, to say the least, requires proof. Nor is it proof, as often said, that is should be so. Additionally it should be observed that the wealth and solvency of a nation depend on what its national economy produces. If borrowing and spending enhance production, as the Keynesian ideas held, then such borrowing and spending enhance solvency. Only rarely do borrowing and spending enchance wealth for a family. It was an enduring complaint of Keynesians that their opposition did not understand what they were trying to do. It was equally the case that the Keynesians did not understand the depth of the tradition to which their opposition was subject or the powerby which it was governed."

From Chapter 16: War and the Next Lesson

Effect of US Price controls during the Second World War

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 256


"A myth to the contrary, assiduously cultivated by devout friends of the market, these controls were highly effective. From the 1942 though 1945, the wholesale prices of industrial commodities were virtually stable -


Given the scale of the military effort and the associated budget deficit, it is beyond doubt that, in the absence of controls, there would have been large, accerlating war prices and wages would almost certainly have been doubling, perhaps trebling each year, maybe more. It is also part of the adverse legend that there was a serious black market and a sharp deterioration in quality. These the indexes did not measure. In fact, the proportion of all transactions in the black market was small even at the end of the war. And quality deterioration poses technical problems. It is not easy, even with determination, much to reduce the quality of gasoline, coal, electricity or even numerous foods."

From Chapter 18: Good Years: The Preparation

US Economy from 1948 to 1967

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 266

"The twenty years from 1948 through 1967 may well be celebrated by historians as the most benign era in the history of the industrial economy, as also of economics. The two decades were without panic, crisis, depression or more than minor recession. In only two years, 1954 and 1958, did output fail to expand in the United States. It was during these decades that the new term Gross National Product, or G.N.P., entered the language;


In these years American business leaders, meeting on occasions of public ceremony and comparing their performance with that of the Communist countries, found themselves all but overwhelmed by their own praise. Economists, while reserving some of the credit for themselves, did not disagree. Nor secretly did many Communists. It was a very difficult time for critics of the capitalist system."

From Chapter 18: Good Years: The Preparation

Kuznets' calculations during WWII

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 276

"Under Nathan's guidance the Kuznets calculations achieved major use and prominence during the war years; they showed what increases in total output were possible, what was going to civilian investment and consumption and what, accordingly, could be made available for military purposes. Knowledge of these magnitudes had much to do with making American and especially British wartime planning more rational than that of Germany were such information was lacking."

From Chapter 18: Good Years: The Preparation

Watering down of the US Employment Act of 1946

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 279

"The victory of the conservative counter-attack against Keynes - who, along with Henry Wallace, Stuart Chase and William Beveridge, was strongly featured in the debate as one of the devils to be exorcised - seemed reasonably complete.

It was also Pyrrhic.


In the twenty years following the passage of the Employment Act and the establishment of the Council of Economic Advisers there has been published each January the Economic Report of the President; it is a professionally competent statement on the recent behaviour of the economy and the prospect. These reports have not been without drawbacks; raely has an administration looked back on its work and found it poor. Never has it assessed the results of its intended policy and found them other than in the right direction."

From Chapter 19: The New Economics at High Noon

Keynes a bigger threat than Marx

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 279

"In the years following the Second World War in the United States, a reference to Keynes, rather more than one to Marx who was a less relevant menace, was thought to arouse conservative antagonism that might otherwise be silent, exclude moderate acquiescence that might otherwise be had. Though the Keynesian result was acceptable, the name of Keynes was a red flag."

From Chapter 19: The New Economics at High Noon

Effects of Vietnam War

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 287

"It was not to last. Beginning in 1966, there were lage increases in spending for the Vietnam war. To the natural reluctance to increase taxes there was added the greater reluctance to increase them for an unpopular war. Not until 1968 was a surtax for war spending finally voted. Meanwhile expanding demand put pressure on prices and living costs. As these rose so did the pressure for higher wage settlements. It was part of the bargain, after all, that prices would be stable. At the same time, the moral authority of the government, which had now to recruit support for a widely rejected war, had been sadly weakened. So, as the need for the guideposts increased, their effectiveness dinimished."

From Chapter 19: The New Economics at High Noon

Flaw in Keynesian Economics: Corporate Power and Union Power

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 289

"Thus the flaw. The experience of the good years showed that economic power - that of the corporations and unions - could defeat efforts to combine high employment with stable prices. So in practice intervention was essential. But the practice never became part of the principle, and the principle became highly influential. There is a hopeful myth that, on matters as deeply of concern to the citizen as economic policy, the citizen decides. Perhaps in the long run he does; he retains the happy right eventually to expel from public office those who fail. But in the interim before failure becomes evident or the expulsion becomes possible, economic policies, like open-heart surgery, are in the hands of the specialists. Thus what economists believe or wish to believe - the economic principles to which they repair - are not matters of passing detail. They are decisive.

The next flaw was the fatal inelasticity of the Keynesian system."


From Chapter 19: The New Economics at High Noon

Inflation, anti-inflation and the views of the affluent

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 292

"Reinforcing this elementary obstacle are the politics of the policy - of using tax increases against inflation. It is the income and corporate taxes that must be used; the impact of these, if they are levied with any approach to equity, is heavily on the affluent. In the past, Ricardo's moneyed men were notable for their opposition to inflation. But when the measures for controlling inflation have a special impact on the incomes of the rich, this opposition greatly subsides. Perhaps, for those so involved, it is more profitable to have the inflation. In any case, the use of taxes as an anti-inflationary instrument immensely dampens the anti-inflationary ardour of the affluent.

If taxes cannot be increased except under the force majeure of war and public expenditures cannot be decreased much for any reason, it follows that Keynesian policy is unavailable for limiting demand. It can expand purchasing power but it cannot contract it. During the twenty good years no reliable method was devised for dealing with the wage-price spiral - with direct market power as a cause of inflation. And fiscal policy was also becoming unavailable for dealing with inflation. The goals were there; the instruments for reachign them were becoming distressingly inoperative.

There was one excpetion, and that was monetary policy. Nothing in the decline of other instruments was as unfortunate as the increasing faith in this one."

From Chapter 19: The New Economics at High Noon

Modern Monetary Policy

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 293

"And best of all was the freedom of monetary policy from interference from any of the inconveniences of public process. Monetary policy ' .... enjoys a degree of flexibilty which fiscal policy does not enjoy: The decisions of hte Board of Governors are not subject to the time-consuming procedures which characterize congressional action or to the time lapse which may occur between the enacting and the applying of fiscal policy.'(13)

But much of the revival was owing to the effective evangelism of hte most diligent student of monetary policy and history during these years. Professor Milton Friedman. As a devout and principled conservative, Professor Friedman saw monetary policy as the key to the conservative faith. It required no direct intervention by the state in the market. It elided the direct management of expenditures and taxation, not to mention the large budget, which was implicit in the Keynesian system. It was a formula for minimizing the role of government - for returning to the wonderfully simpler world of the past."

(13) Campbell R. McConnell, Economics, 4th edition (New York: McGraw-Hill Book CO., 1969), p. 332. This is one of the two or three most widely used textbooks in economics.

From Chapter 19: The New Economics at High Noon

The flaw, the sparks, the flame, the wind, Nixon

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 295

"In the years to come, Professor Friedman's breath-takingly simple solution would not, in fact, be tried. But it would powerfully support the hope that all problems could be solved by the magic of monetary management. Alas.

Thus the flaws of Keynsian economics or, to change the metaphor, the sparks that, in the late sisties and early seventies, would become the flame. It was the genius of the Nixon economists that they would now supply the wind."

From Chapter 20: Where it Went

Not easy to be unfair to Richard Nixon

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 299

"And as the hopeless course was emphasized by the President, the important power was rejected. There would be no interference with prices and wages. The previous hope for restraint was replaced by an inviation to corporations and unions to exercise whatever market power they possessed and might find immediately rewarding. In dealing with Mr Nixon, it is not easy to be unfair. He invites and justifies all avilable criticism."

From Chapter 20: Where it Went

Inflation and Recession

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 300

"Unemployment, as before, was not the alternative to inflation. There could, as before, be both. Monetary policy could suppress activity and increase unemployment, and expecially in those industries - housing, and the construction industry generally, being the leading examples - which depend on borrowed money. The market power of corporations and unions meanwhile could keep prices going up as before. The modern capitalist economy could suffer inflation. And it could suffer recession. And it could, up to a painful level of unemployment, have both at the same time. However, the economists whom Mr Nixon had brought to Washington were not men of shallow faith. Concessions might be made to reality but this could be only out of short-run political necessity.

Such concessions were made. Political courage is a much admired force for public good. The benigh impact of political cowardice deserves more praise than it commonly receives. By the summer of 1971, a presidential election was only a year and a few months away. All polls showed that the public reaction to tne new combination of inflation and unemployment was, not surprisingly, adverse. The major candidates for the Democratic nomination showed evidence in the polls of swamping Mr Nixon. Economists can urge suffering for a principle. And they can urge the public to exercise patience while processes, presumed to be ultimately benign, work themselves out. Unfortunately patience cannot be legislated or achieved by Executive Order. And pleas for its voluntary exercise have their primary impact on those making them.

Strong overtures were made to higher economic principle and to patience.


But he strongly rejected such peculiarity, dimissed the economics of a freeze of prices as 'illusory' and be a serious threat to individual freedom'. That corporations and unions already exercise such control and thus, presumably endanger freedom was not stressed.


It is hard not to dwell on the foregoing statement. The combination of wishful thought and sheer recklessness is impressive. The problem addressed by the controls - that created by the market power of corporations and unions - is not new but old. No one suggested that corporations and unions would disappear. But the problem would disappear."

From Chapter 20: Where it Went

Applying policy to where it is needed

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 313

"Not much in the history of money supports a linear view of history, one in which the knowledge and experience from one epoch provide the intelligence for improved management in the next. Of those who give guidance on these matters history says even less. Out of the 2500 years of experience and 200 years of ardent study have come monetary systems that are as unsatisfactory as any in the peacetime past. In recent times conservatives have reacted adversely to inflation, though not with great enthusiasm to the measures for preventing it. Liberals have thought unemployment the greater affliction. In fact no economy can be successful which has either. Inflation causes discomfort and frustration for many. Unemployment causes acute suffering for a lesser number. There is no certain way of knowing which causes the most in the aggregate of pain. It was the prime lesson of the thirties that defaltion and depression destroyed international order, caused each nation to try for its own salvation, indifferent to the damage that its efforts caused to neighbours. It has equally been the lesson of the late sixties and early seventies that inflation too destroys international order. Those who express or imply a preference between inflation and depression are making a fool's choice. Policy must always be against whichever one has."

From Chapter 21: Afterward

Acts of Governments now held accountable for economics hardship

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 317

"Finally, to repeat, what served as adequate performance in the past in acceptable no longer. After the Napoleonic Wars in Britain and the Civil War in the United States, steps were taken to restore monetary stabilty and re-establish specie payments. Farm prices fell sharply. There was some increase in unemployment. There was much complaint but it was not oeprative. Economic hardship was then far from unnatural. Low prices, low wages and loss of jobs were not precisely acts of God. But they were not yet acts of government. Now, needless to say, they are."

From Chapter 21: Afterward

Final Comment

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 325

"There is one final prospect, also deeply rooted in this history. Nothing, it is worth repeating once more, last for ever. That is true of inflation. It is true of recessions. Each stirs the attitudes, engenders the action which seeks to bring itself to an end - and eventually does. But we have seen that the action required, including the action needed to avoid the increasingly probable combination of inflation and recession, is demanding and complex. And it becomes ever more so. The increasingly demanding character is the main message of this afterward. If anything is certain from this history, it is that those who see themselves as the strongest defenders of the system, those who proclaim themselves the most stalwart friends of free enterprise, even capitalism, will be the most fearful of measures designed to conserve the system. They will be the most antagonistic to the action that will improve its performance, enhance its reputation, increase the capacity to survive. Those who pray for the end of capitalism should never welcome the activist and affirmative spirit of the New Deal, the Second World War and after, or the New Fontier. This spirit, however on occasion the victim of its own enthusiasm, optimism or obligation to appease the opposition, is open to the efforts that make the system work. When motivated by such spirit, the system has worked - in the United States to the satisfaction of, at a minimum, something exceeding a majority. Those who yearn for the end of capitalism should pray for government by men who believe that all positive action is inimical to what they call thoughtfully the fundamental principles of free enterprise."

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