The managed currency: should money be governed for the stability of domestic prices, or held to an external standard whatever the domestic cost?

John Maynard Keynes, answered from the texts and cited to the page.

The position in brief

The gold standard is already a barbarous relic; the question is not whether money shall be managed but by whom and toward what. Changes in the value of money redistribute wealth between the investing and the business classes and between debtor and creditor, arbitrarily and on a scale that no tax would be permitted to reach. Deflation is the graver evil of the two, because it strikes at employment.

Price-level movement originates in the divergence between saving and investment, and bank rate is the instrument that opens or closes the gap.1234

Sources

  1. The bank-rate is now employed, however incompletely and experimentally, to regulate the expansion and deflation of credit in the interests of business stability and the steadiness of prices. In so far as it is employed to procure stability of the dollar exchange, where this is inconsistent with stability of internal prices, we have a relic of pre-war policy and a compromise between discrepant aims.
    Persuasion, collected essays 1919-1931, [17]–[19]
  2. From 1914 to 1920 all countries experienced an expansion in the supply of money to spend relatively to the supply of things to purchase, that is to say Inflation. Since 1920 those countries which have regained control of their financial situation, not content with bringing the Inflation to an end, have contracted their supply of money and have experienced the fruits of Deflation.
    Persuasion, collected essays 1919-1931, pp. 79–81
  3. At any rate, some account should be taken of these considerations, based on social expediency and the avoidance of waste and friction, along with considerations of social justice, in deciding what it is best to do.
    A Treatise on Money Vol I - The Pure Theory of Money, pp. 170–171
  4. The bank rate is now employed, however incompletely and experimentally, to regulate the expansion and deflation of credit in the interests of business stability and the steadiness of prices. In so far as it is employed to procure stability of the dollar exchange, where this is inconsistent with stability of internal prices, we have a relic of pre-war policy and a compromise between discrepant aims.
    A Tract on Monetary Reform

Where the argument is made

  • A Tract on Monetary Reform (1923), especially ch. I ("The Consequences to Society of Changes in the Value of Money"), ch. III ("The Theory of Money and of the Foreign Exchanges"), and chs. IV–V
  • A Treatise on Money (1930), vol. I bks. III–IV (the fundamental equations, the distinction between savings and investment, the modus operandi of bank rate) and vol. II bk. VII ("The Management of Money")

How the argument was received

Won institutionally — every modern central bank manages a currency against a domestic target — while the specific apparatus of the Treatise, the fundamental equations, was abandoned by its author as transitional.