by PRABHAT PATNAIK
Under the Gold Standard the values of different currencies were fixed in terms of gold, which meant that the exchange rates between those currencies were fixed. Exchange rate movements therefore could not be used to enlarge net exports and hence domestic employment. At the same time governments were committed to the principle of “sound finance”, a commitment that lasted well into the Great Depression of the thirties; this meant that they insisted upon balancing budgets, which ruled out the possibility of State intervention through fiscal means for enlarging domestic employment. Since consumption expenditure depends upon the level of activity in the economy and investment expenditure upon the “state of confidence” of the capitalists, in the entire period spanning the late nineteenth and early twentieth centuries, capitalism did not have any internal economic mechanism for deliberately stimulating domestic employment. This according to John Maynard Keynes was a major cause for the competitive struggle among capitalist powers for annexing external markets, and hence of wars between them.
Keynes, however, was wrong on this score, not on his economic theory but on his facts.
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