THE FIFTH HENRY THORNTON LECTURE
T H ElUCITY
UNIVERSITY
BUSINESS SCHOOL
ALLAN H. MELTZER
Carnegie-Mellon University
T H E CITY U N I V E R S I T Y
Centre for Banking and International Finance
October 1983
, THE FIFTH HENRY THORNTON LECTURE
KEYNES ON MONETARY REFORM
AND INTERNATIONAL
ECONOMIC ORDER
ALLAN H. MELTZER*
Carnegie-Mellon University
* Allan Meltzer obtained degrees in Economics from Duke University and the University
of California, Los Angeles before his P h D degree was awarded by the University of
California, Los Angeles in 1958.
Professor Meltzer is an Advisor to the US Federal Reserve, the US Treasury and various
banks in different parts of the world.
H e is Founder and co-chairman with Karl Brunner of the Shadow Open Market
Committee since 1973.
He is co-editor of Carnegie-Rochester papers on Public Policy and co-editor of Carnegie
papers on Political Economy.
He is also a Visiting Professor at the Centre for Banking and International Finance,
The City University Business School.
T H E CITY U N I V E R S I T Y
Centre for Banking and International Finance
, ABSTRACT
Allan Meltzer's Henry Thornton Lecture - the fifth in the series - is devoted to the views
of Keynes on monetary reform and the international economic order. Keynes did not
live to see and help to shape the post-Bretton Woods world, but his ideas have influenced
economics, politics and business to this day. Allan Meltzer notes that Keynes, in his
professional life spanning two world wars, changed his mind in three important ways.
First, he came to view institutions not as neutral mechanisms delivering desired objectives
but as constraints which determine whether objectives can be realised. Second, he moved
from opposition to the gold standard and floating exchange rates towards advocating
a fixed but adjustable exchange rate system. Third he turned from liberal to restrictionist.
O n other significant issues Keynes did not go as far as some of his followers. He never
believed that money does not matter. Whereas his theoretical preoccupations in the
latter part of his life were with the real economy and the trade cycle, his applied work
was primarily on shaping the international monetary system. He viewed monetary
control as a necessary condition for price stability. Monetary control together with periods
of higher unemployment were sufficient conditions for price stability but costlier
compared with the alternative of exchange rate and capital controls. He did not favour
" K e y n s i a n " inflationary policies to reduce unemployment and was in favour of rules
and against fine-tuning in international monetary affairs. In domestic monetary policy
he encouraged discretion only within the limits of the international monetary rules.
H e believed that no system could simultaneously achieve internal and external stability,
high employment and freedom. 44 He chose to sacrifice freedom." He advocated exchange
control (on capital movements, not on goods movements) and regulations of domestic
and foreign investment.
Allan Meltzer believes that freedom need not be sacrificed. H e retains Keynes' basic
insight that international monetary stability can be achieved if countries commit
themselves to a consistent set of policies. This could be accomplished by governments'
pre-commitment to a predictable course. Meltzer's solution is to combine Keynes'
suggestion from the Tract, to impose discipline on domestic monetary expansion, with
Friedman's monetary rule operating on the monetary base. Such a combination would
no longer require capital restrictions and would lead to reduction in exchange rate
fluctuations. This view implicitly assumes that the benefits from increased international
trade and domestic output outweigh the costs of unemployment from monetary restraint.
Would Keynes have accepted this proposition today? For the short run?
Zannis Res
EDITOR December 1983
ii
T H ElUCITY
UNIVERSITY
BUSINESS SCHOOL
ALLAN H. MELTZER
Carnegie-Mellon University
T H E CITY U N I V E R S I T Y
Centre for Banking and International Finance
October 1983
, THE FIFTH HENRY THORNTON LECTURE
KEYNES ON MONETARY REFORM
AND INTERNATIONAL
ECONOMIC ORDER
ALLAN H. MELTZER*
Carnegie-Mellon University
* Allan Meltzer obtained degrees in Economics from Duke University and the University
of California, Los Angeles before his P h D degree was awarded by the University of
California, Los Angeles in 1958.
Professor Meltzer is an Advisor to the US Federal Reserve, the US Treasury and various
banks in different parts of the world.
H e is Founder and co-chairman with Karl Brunner of the Shadow Open Market
Committee since 1973.
He is co-editor of Carnegie-Rochester papers on Public Policy and co-editor of Carnegie
papers on Political Economy.
He is also a Visiting Professor at the Centre for Banking and International Finance,
The City University Business School.
T H E CITY U N I V E R S I T Y
Centre for Banking and International Finance
, ABSTRACT
Allan Meltzer's Henry Thornton Lecture - the fifth in the series - is devoted to the views
of Keynes on monetary reform and the international economic order. Keynes did not
live to see and help to shape the post-Bretton Woods world, but his ideas have influenced
economics, politics and business to this day. Allan Meltzer notes that Keynes, in his
professional life spanning two world wars, changed his mind in three important ways.
First, he came to view institutions not as neutral mechanisms delivering desired objectives
but as constraints which determine whether objectives can be realised. Second, he moved
from opposition to the gold standard and floating exchange rates towards advocating
a fixed but adjustable exchange rate system. Third he turned from liberal to restrictionist.
O n other significant issues Keynes did not go as far as some of his followers. He never
believed that money does not matter. Whereas his theoretical preoccupations in the
latter part of his life were with the real economy and the trade cycle, his applied work
was primarily on shaping the international monetary system. He viewed monetary
control as a necessary condition for price stability. Monetary control together with periods
of higher unemployment were sufficient conditions for price stability but costlier
compared with the alternative of exchange rate and capital controls. He did not favour
" K e y n s i a n " inflationary policies to reduce unemployment and was in favour of rules
and against fine-tuning in international monetary affairs. In domestic monetary policy
he encouraged discretion only within the limits of the international monetary rules.
H e believed that no system could simultaneously achieve internal and external stability,
high employment and freedom. 44 He chose to sacrifice freedom." He advocated exchange
control (on capital movements, not on goods movements) and regulations of domestic
and foreign investment.
Allan Meltzer believes that freedom need not be sacrificed. H e retains Keynes' basic
insight that international monetary stability can be achieved if countries commit
themselves to a consistent set of policies. This could be accomplished by governments'
pre-commitment to a predictable course. Meltzer's solution is to combine Keynes'
suggestion from the Tract, to impose discipline on domestic monetary expansion, with
Friedman's monetary rule operating on the monetary base. Such a combination would
no longer require capital restrictions and would lead to reduction in exchange rate
fluctuations. This view implicitly assumes that the benefits from increased international
trade and domestic output outweigh the costs of unemployment from monetary restraint.
Would Keynes have accepted this proposition today? For the short run?
Zannis Res
EDITOR December 1983
ii
