This provocative questions come via Pragmatic Capitalism is an
excellent and short post wherein the author discovers that Keynes may well have not understood monetary supply.
In my student days, I was versed in the ways of Milton Friedman - the original monetarist. A couple of his books still sit gathering dust on my bookshelf. One of the things I learned was that the government creates money through the banks.
As Cullen Roach at pragcap.com likes to describe it, the government has privatized the creation of money through the banking system. In economics terms this is often called the money multiplier, which, by the way, has been less than one for a long, long time. That is, for every dollar the government prints, less than one dollar is making its way into the economy.
(Click on the graphic to enlarge)
The picture is the money velocity within the monetary system of the United States. The top (red) line shows that for every dollar the Fed prints, less than one dollar is making it into the economy. There are a lot of reasons for this (mostly related to the still hampered condition of the banks) but that waaaayyy beyond the scope of this post.
I find Keynesian economics sound but its application in the real world is frightfully bad and it is nothing but a temptation to the weaker instincts of politicians. Now, having said that, did Keynes really understand the mechanics of the creation of money? And, if not, is that failing still having an impact today in our Federal Reserve's actions? Things that make you go hmmm ...
