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Keynes at 140: British Economist Argued Against Printing Money to Finance Deficits

  • The study’s publication coincides with the famed economist’s 140th birthday

Montreal, June 5, 2023 – Famed British economist John Maynard Keynes would have disagreed with the Bank of Canada’s policy of purchasing government bonds with newly-minted cash, according to a joint study published by the Montreal Economic Institute and the Morocco-based Arab Center for Research this morning.

“Keynes would have had one or two things to say about the Bank of Canada’s announcement that it would purchase hundreds of billions of dollars in government-bonds,” said Mohamed Moutii, associate researcher at the MEI and the study’s author. “He would have argued—correctly—that the high inflation Canadians and others around the world are enduring is a direct consequence of the large-scale issuing of new money to finance government deficits.”

Despite efforts to shrink it, the Bank of Canada’s balance sheet is still more than 300 per cent of what it was prior to the pandemic, down from nearly 500 per cent in February 2021. This is a direct result of the Bank’s policy of purchasing government bonds by the hundreds of billions, increasing the country’s money supply—also known as “money printing.”

The early work of Keynes takes a very critical view of issuing new money to finance government spending. The economist argues that such cash infusions result in price inflation, which lead in turn to economic instability.

In The Economic Consequences of the Peace (1919), Keynes wrote:

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.

In the same volume, Keynes argues that inflation amounts to a hidden confiscation of a citizenry’s wealth by their government through a reduction in their spending power, having an effect akin to a tax:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they also confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.

“Politicians like to use Keynes to justify their deficits, but even he would take a grim view of these and the way they were financed in recent years,” said Mr. Moutii. “There is no such thing as a free lunch, as we’re now seeing with the inflation that has resulted from the large-scale issuing of cash that financed massive pandemic deficits.”

You can consult the joint MEI and ACR publication here.

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The MEI is an independent public policy think tank with offices in Montreal and Calgary. Through its publications, media appearances, and advisory services to policy-makers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship. 

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