WND column

The Flaw in the Ointment

According to the modern Friedman-Keynes synthesis, there are two tools in the hands of most national authorities that permit them to attempt fine-tuning the economy. The first tool, monetary policy, is the bailiwick of the central bank, which in the United States is known as the Federal Reserve. It has great influence over interest rates, which represent the price of money. Increasing the interest rate is supposed to force the economy to contract, while lowering it is believed to encourage the economy to grow.

“There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto.”

– John Maynard Keynes, “The General Theory of Employment, Interest, and Money”