Keynes, Inflation, and the Public Debt: "How to Pay for the War" as a Policy Prescription for Financial Repression?

Abstract

This paper discusses whether John Maynard Keynes’ "How to Pay for the War" provided prescriptions for the policies of "financial repression" that were implemented in England, and other countries, following World War II. It focuses on contemporary understandings of inflation which has been identified as a key factor for driving down public debt levels. Keynes has been widely acknowledged as influential in the management of public debt, and "How to Pay for the War" has been cited as proof for a widely held belief in "money illusion", suggesting the possibility of using inflation for driving down real interest rates of public bonds. It seems reasonable to suppose that Keynes’ writings were instrumental in translating English monetary experiences of the 1920s and 1930s into expectations of policy makers during and after the Second World War, and thus provide an important explanation for the why and when of "financial repression". The paper argues that Keynes provided only partly ammunition for a policy of "financial repression", and none for using inflation as a "tax gatherer" to the detriment of domestic savers in general. Crediting him as a source for widespread "money illusion" is also out of line with the historical record.