Keynes and Money, or Where Has All the Money Gone?

Note: The following article appeared in the Salisbury Review in December 2025. This brings out an important theme of my new book called ‘Keynes for Our Times’, which is being published in May 2026. Here is a link if you are interested in buying a copy: https://yalebooks.co.uk/book/9780300286830/keynes-for-our-times/

In this post, I draw attention to the misuse of Keynes for the purpose of rearmament, something I call ‘Military Keynesianism.’ In previous posts, I have drawn attention to the danger of imaginary wars, not just justifying increases in military spending, but of leading to real wars through escalation.

I have been assembling some material on our imaginary war against China, which I will post on Monday. In a new feature called paranoid corner.

I

The economics of John Maynard Keynes (1883–1946) was built on his philosophy. Economics was the means to the good life, not the good life itself. Keynes’s own genius was practical, and so both his temperament and the events of his time conspired to keep him anchored in the realm of means. However, his critique of the economics of his day was shot through with his philosophical commitments, and nowhere is this more evidently true than in his treatment of money.

In the economics of Keynes’s day, money was seen as a more efficient form of barter; ‘a mere contrivance for facilitating the distribution of produce’, wrote John Stuart Mill. It did this by providing a measuring rod or ‘ruler’ in terms of which goods could be priced. To be a trustworthy measure of value, the value of money itself had to be stable. It was the job of central bankers to keep a fixed relationship between the supply of paper money and the supply of gold. This was the theory John Maynard Keynes inherited when he started lecturing on economics in 1909. People acquired money, he told his students, only to get rid of it as quickly as possible.

However, in 1933 he would make the astounding claim that money, far from being the insignificant thing of the classical economists, played ‘a part of its own’ in the economic drama. It is both life-giver and vampire, pumping blood into economic life and sucking blood out of it.

In making this claim, Keynes stressed the distinction between money as a medium of exchange and money as a store of value. The standard economics of his day made very little of this. A lot of consumption is necessarily ‘lumpy’. Saving is a way of smoothing consumption over time. What Keynes did was to transform the ‘store of value’ function of money into a ‘demand for money to hold’, independent of any desire to purchase produced goods, present or future.

In The Treatise on Money (1930), Keynes divided up money flows into two circulations, the ‘industrial’ and the ‘financial’. The first, which maintains ‘the normal process of current output, distribution and exchange, and [pays] the various factors of production, their incomes…’, corresponds to the barter theory of money. The novelty was the second, or financial circulation, which pays for ‘stock exchange and money market transactions [and] speculation’ and which has little or no relation to the productive economy. He used this schema to explain business cycles: boom and bust result from shifts between the two circulations, as confidence rises and falls.

Keynes’s attack on the classical theory of money culminated in his General Theory of Employment, Interest and Money (1936). Here he introduces the concept of liquidity preference into the theory of money. People may prefer to keep their money ‘liquid’ rather than investing it in fixed assets like plant and machinery. This clearly reflects the experience of the Great Depression which started in 1929.

Keynes used the new theory to explain why the heavy unemployment of the 1930s was so prolonged. Classical economics could not explain it, he argued, because it had the wrong theory of the rate of interest. And it had the wrong theory of interest because it had the wrong theory of money.

In classical theory, the interest rate is the price which equilibrates saving and investment. People save only to invest; the interest rate ensures their equality. If the desire to save runs ahead of the desire to invest, interest rates will fall, reducing the rewards to saving, increasing the expected rewards to investment, and thus equalising the two at an unchanged volume of activity.

But, Keynes reasoned, the collapse of investment is simultaneously a flight into liquidity. This flight gives money a liquidity premium, which causes interest rates to rise rather than fall—the exact opposite of what orthodox theory believed. This led him to propose the rate of interest as the reward for not hoarding, rather than for saving. The ‘excess saving’ relative to investment which causes the slump will then be liquidated not by a fall in the rate of interest, but by a fall in national income, leading to ‘underemployment equilibrium’. This is the gist of The General Theory.

This whole story depends crucially on the existence of irreducible uncertainty about future events. As Keynes writes:

By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty… Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.

It is uncertainty which gives money its starring role in the economic drama. In such information-poor ‘we don’t know’ markets, investors rely on conventional opinion about future prices. When the conventions break down, as they are periodically bound to, being so ‘flimsily based’, there is a flight from commitment into money. Far from being the insignificant thing described by Mill, money takes control of the economic action as a way of coping with uncertainty. This, in a nutshell, is Keynes’s economic theory of money.

II

Would Keynes have given money such a starring role had he not found something intrinsically immoral about it? Probably not. There is a strong moral/psychological underlay to Keynes’s view, according to which the ‘demand for money to hold’, far from being the rational balancing act between present and future goods depicted by the economists, is motivated by avarice, love of power, and love of gold—Shakespeare’s Shylock combined.

Love of money as a disease of the soul is symbolised in the legend of the ancient king Midas of Phrygia, whose greed for gold was so intense that (in some versions at least) he starved to death. The love of gold exhibited by Midas is not a case of rational liquidity preference, but a psychological morbidity. Its paradoxical nature was succinctly stated by Aristotle, who in Book I, chapter 9 of the Politics asks: ‘How can that be wealth of which a man may have a great abundance and yet perish with hunger, like Midas in the fable, whose insatiable prayer turned everything that was set before him into gold?’ On countries which remained on the gold standard, Keynes predicted in 1931, ‘will fall the curse of Midas’.

In drawing on the legend of Midas, Keynes mined a deep-seated tradition in Western thought which regards money as barren, and therefore the love of it perverse. He acknowledged that in the past ‘risks and hazards of all kinds’ may have played a large part in inducing people to hoard money. He was puzzled, though, by what he saw as the persistence of this propensity in modern European civilisation, when conditions of life were much more secure. It was to explain this riddle that he developed the idea that ‘love of money’ was the particular pathology of a character-type produced by Judaic-Christian civilisation.

The resemblance to Max Weber’s Protestant Ethic is obvious. But whereas Weber portrayed the Puritan as a heroic entrepreneur, for Keynes his ‘inordinate desire for the getting and hoarding of wealth’ can make him a brake on enterprise. Enterprise lay with the borrower, not the lender: it is not thrift but enterprise which builds cities and drains fens. The liquidity premium demanded by wealth holders gives the creditor class inordinate power in a capitalist economy. In Keynes’s telling, the struggle for power between lenders and borrowers, creditors and debtors, is the economic plot of history. In it are to be found the histories of inflation and deflation, with stable prices as rare moments of balance between the two.

Keynes’s championship of the debtor clearly emerges in his attacks on usury. Two moral claims underpinned the medieval usury laws. First was the view that a debt contract is a kind of unfair trade, since the lender is nearly always in a stronger position than the borrower. Second, the usury laws reflected the deep-rooted hostility to ‘making money out of money’.

Keynes emphatically endorsed the first principle: ‘It is usury’, he wrote in 1945, ‘to extract from the borrower some amount additional to the true sacrifice of the lender, which the extremity of the borrower’s needs makes feasible; it really amounts to the same thing as my theory of liquidity preference’.

The purpose of all Keynes’s economic reforms was to reduce the power of the creditor over economic life. Inflation and deflation are both unjust, he wrote in 1923, but in an impoverished world it was ‘worse to provoke unemployment than to disappoint the rentier’. He saw this as the world which the slaughter and destruction of the First World War had left. The problem in this world was not inflation but deflation. We can trace this thread from his argument for forgiveness of German debt in 1919, to his goal of achieving the ‘euthanasia of the rentier’ in 1936, to his successive plans to prevent the hoarding of gold by creditor countries. ‘Adjustment [of current account imbalances]’, he wrote in 1941, ‘is compulsory for the debtor, voluntary for the lender’. His International Clearing Union plan, vetoed by the Americans at Bretton Woods, was designed to make it very expensive and ultimately impossible for surplus countries to hoard their surpluses.

Yet Keynes’s attitude to ‘love of money’ is ambiguous. It was a disease of the soul, but also a felix culpa, because it is the engine of the economic growth which will free humanity from the burden of toil, and thus enable a return to paradise. Till this utopia arrives, Keynes writes, we must pretend that ‘fair is foul and foul is fair’. To expedite its arrival, the state should, through its own investment programmes, ensure that ‘the inordinate desire for getting wealth’ be harnessed to productive investment and not siphoned off into speculative hoards.

III

Our contemporary economic problem is readily summarised in a couple of sentences. As a result of extensive deregulation of the financial system, money has seized control of the world capitalist economy. The result is much as Keynes would have predicted: widespread stagnation punctuated by financial instability.

The problem of Keynes’s day was mass unemployment. The problem in the 1970s and 1980s was inflation, partly produced by the mistakes of the Keynesian managers. As a result, the Keynesian system for managing economies was overthrown. Prevent inflation, argued Nigel Lawson, Britain’s Chancellor of the Exchequer from 1983–1989, and a deregulated economy would produce full employment.

Large sections of Western economies were privatised and deregulated in the 1980s and early 1990s in the name of freedom and efficiency. This included abolition of exchange controls and deregulation of banking. Money was set free to roam the world in search of the highest profit. As a result, it escaped the cage in which the managed economies of the 1950s and 1960s had placed it, re-emerging as the Great Dictator.

The banking collapse of 2008 was triggered by the collapse of debt-fuelled housing booms in the United States and Britain—as Martin Wolf remarked, the monetary authorities of the two countries had turned their populations into ‘highly leveraged speculators in a fixed asset’. Since 2008, the central banks of the developed economies have pumped $15 trillion into their economies by buying up the debt of collapsing banks, credit agencies, even governments. Quantitative easing, as this was known, has facilitated the rise to power of a new breed of fabulously rich ‘oligarchs’: Elon Musk (net worth $500bn), Mark Zuckerberg ($220bn), Jeff Bezos ($250bn), and so on.

Economic growth from the ‘trickling down’ of this money to the real economy was supposed to enable the repayment of the debt. But the immense monetary pump-priming did not produce the required growth. One reason is that a large share of the liquidity created by QE ended up circulating within the shadow banking system rather than financing productive investment in the real economy. The consequence has been a build-up of net public and private debt, and a corresponding rise in money’s liquidity premium.

So how do governments escape their debt traps? The answer is depressingly obvious. John Lanchester has written: ‘However little money there is for anything else, there’s always enough money for a war’. ‘Military Keynesianism’ is a tempting way out of the economic impasse, providing a geopolitical justification for deficits and debts which would be rejected on neoliberal economic grounds.

As Keynes noted sardonically: ‘Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen in the principles of classical economics stands in the way of anything better’. Since the education of contemporary politicians has regressed to roughly where it was in Keynes’s time, military Keynesianism offers an increasingly tempting escape from stagnation or worse by combining the economics of full employment with the rhetoric of national security. For what do the tedious claims of fiscal austerity and balanced budgets weigh against the urgency of national security?

We are left with a pretty depressing conclusion. The answer to the question: where has all the money gone is ‘mostly into the financial economy’. How can we get it out of the financial economy? By building up the arms industry in its traditional and new hybrid forms. Military procurement policies, unleashed from their orthodox limits, will generate jobs and growth.

Keynes himself would have been depressed, but not surprised by the ease with which war fervour can be stoked up to rationalise Keynesian policies which would otherwise be ruled out. He would not have supported today’s authoritarian states, Russia and China, but neither would he have had any sympathy with those who continually talk up their threat to get money coming their way. In a world currently and much too readily reverting to antagonistic economic and political blocs, his rebuke to the ‘projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion’ is urgently apposite, as the current technology of war can destroy not just civilisation but life itself.