On Monday, Federal Reserve Vice-Chairman Stanley Fischer delivered a speech in Washington D.C. at the 32nd Annual National Association for Business Economics Economic Policy Conference.
There is a lot to chew on in the speech and I analyze the entire speech in the EPJ Daily Alert, but there is one point that deserves to be broadcast to a wider audience.
Early in the speech, Fischer said this:
[I]n 1961, at the end of my school years, on the advice of a friend, I read Keynes's General Theory for the first time...
Just a week ago I took it off the bookshelf to read parts of chapter 23, "Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption." Today that chapter would be headed "Protectionism, the Zero Lower Bound, and Secular Stagnation," with the importance of usury laws having diminished since 1936.What's in chapter 23 of the General Theory?
The relevant part is the discussion about Silvio Gesell's negative interest rate theory. Keynes wrote (my bold)
Gesell's main book is written in cool, scientific language...I don't expect the Fed to implement negative interest rates anytime soon, we are in the wrong phase of the business cycle for that to occur. But it is curious that Fischer is reading up on what Keynes thought about them.
Gesell's specific contribution to the theory of money and interest is as follows...
[H]e had carried his theory to lead him to a practical recommendation, which may carry with it the essence of what is needed...causing money to incur carrying costs...
The idea behind stamped money [carrying costs on money] is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale.
So who is this economist Gesell who Keynes discusses in the General Theory?
The best take on him comes from the economist Henry Hazlitt in his impresiive book The Failure of the New Economics, which is a chapter-by-chapter refutation of the General Theory:
Gesell had attracted some attention in the economic world by proposing a form of money that would automatically lose part of its value every month, like a rotting vegetable...This meant, in effect, that people would have to pay interest to the government for the privilige of holding their own money....Keynes takes it all very seriously....
Keynes's "system," as he came to recognize at the end of the General Theory, was actually a reversion to the naive and discredited theories of the mercantilists and underconsumption theorists, from Mandeville and Malthus to Hobson. It was also reversion to all the inflationist currency cranks,from John Law to Silvio Gesell.It is quite serious that the Federal Reserve vice-chairman is reading up on negative interest theory proposed by an inflationist crackpot. If you didn't think before that the Fed is run by a group that has no understanding of sound monetary policy, this admission by Fischer should provide more insight into the views held by those at the helm of US monetary policy.
They really don't get it, the big developing surprise is how out of touch they are with the developing price inflation that will first hit 3% then 5%.
Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics