This is Keynes, 1923...
“In
the first place, Deflation is not desirable, because it effects, what is always harmful, a
change in the existing Standard of Value, and redistributes wealth in a manner
injurious, at the same time, to business and to social stability. Deflation, as we have already seen, involves a
transference of wealth from the rest of the community to the rentier class and to all holders of titles to money; just
as inflation involves the opposite. In particular it involves a transference
from all borrowers, that is to say from traders, manufacturers, and farmers, to
lenders, from the active to the inactive.
But whilst the oppression of the taxpayer for the enrichment of the rentier is the chief lasting result, there is another, more violent, disturbance during the period of transition. The policy of gradually raising the value of a country’s money to (say) 100 per cent above its present value in terms of goods … amounts to giving notice to every merchant and every manufacturer, that for some time to come his stock and his raw materials will steadily depreciate on his hands, and to every one who finances his business with borrowed money that he will, sooner or later, lose 100 per cent on his liabilities (since he will have to pay back in terms of commodities twice as much as he has borrowed).Modern business, being carried on largely with borrowed money, must necessarily be brought to a standstill by such a process. It will be to the interest of everyone in business to go out of business for the time being; and of everyone who is contemplating expenditure to postpone his orders so long as he can. The wise man will be he who turns his assets into cash, withdraws from the risks and the exertions of activity, and awaits in country retirement the steady appreciation promised him in the value of his cash. A probable expectation of Deflation is bad enough; a certain expectation is disastrous. For the mechanism of the modern business world is even less adapted to fluctuations in the value of money upwards than it is to fluctuations downwards.” (Keynes 1923).
But whilst the oppression of the taxpayer for the enrichment of the rentier is the chief lasting result, there is another, more violent, disturbance during the period of transition. The policy of gradually raising the value of a country’s money to (say) 100 per cent above its present value in terms of goods … amounts to giving notice to every merchant and every manufacturer, that for some time to come his stock and his raw materials will steadily depreciate on his hands, and to every one who finances his business with borrowed money that he will, sooner or later, lose 100 per cent on his liabilities (since he will have to pay back in terms of commodities twice as much as he has borrowed).Modern business, being carried on largely with borrowed money, must necessarily be brought to a standstill by such a process. It will be to the interest of everyone in business to go out of business for the time being; and of everyone who is contemplating expenditure to postpone his orders so long as he can. The wise man will be he who turns his assets into cash, withdraws from the risks and the exertions of activity, and awaits in country retirement the steady appreciation promised him in the value of his cash. A probable expectation of Deflation is bad enough; a certain expectation is disastrous. For the mechanism of the modern business world is even less adapted to fluctuations in the value of money upwards than it is to fluctuations downwards.” (Keynes 1923).
In the above lines, Keynes
is talking about two groups, which can be named as the creditor and the debtor... He says deflation is good for the creditor
and inflation is good for the debtor... He failed to recognize that he is talking
about the same economy... Both, the creditor and the debtor are rich people and
both belong to the same Capitalist-Class, both have money... Therefore, in a
way he is talking about the re-distribution of income within almost the same
class within the same economy... He has failed to bring in poor people in to perspective
who probably are neither creditor nor debtor, but the working class... This
class saves very little to group as the creditor... Banks are the real creditor...
Businesses do not borrow directly from people; rather they borrow from banks,
which collect deposits from the public... Moreover, they are also not the
debtor or businessmen... In this scene if there is deflation in the economy, then
it is likely to benefit the working-class, the larger group in terms of numbers...
Lower-prices would increase consumption and savings which means higher demand
and supply, and thereby profits... Moreover, within the same economy, with a
given level of income, inflation or deflation would affect everybody in the
same way... Everybody consumes and saves, but everybody is not a debtor or businessman;
however people may take loans for other goods and services, which also might be
lower because of lower prices... Capacity to take loans would increase... Lower
prices also mean lower interest-rate, which is actually good for businesses
too...
Keynes, possibly,
missed that the economic-policy and distribution of income may be there to
reduce poverty and inequality, and, increase consumption and savings, for which
deflation, and not inflation, is the right strategy...
Lower-prices and lower
interest-rate would help everybody... Keynes also did not take interest-rates
into account... They are also important for investment spending and loans by
house-holds...
His classification of
the economy in the two groups and not the economy as a whole has made his
theory out of context...
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