Ricardo and Keynes on war finance

Conclusion Ricardo and Keynes were remarkably close on many of the practical problems of war finance, despite their sharp and somewhat polemical difference on the question of whether an over-issue of currency or an excessive aggregate demand was exclusively the cause of inflation. During a war, when both the quantity of money and aggregate demand are excessive, they would both predict inflation. And, they stood together in the fight against the evils of inflation, because it caused a violent and unjust redistribution of income and wealth. They both accepted the obvious fact that wartime expenditures would crowd out private spending, but they denied that this would necessarily affect interest rates. Keynes expected the short-run marginal efficiency of capital to adjust to the rate of interest established by the Bank of England; whereas Ricardo expected the bank rate to adjust to the long-run rate of profit under a regime of full convertibility. Ricardo recognized, however, that the bank could set arbitrarily low nominal rates of interest, even during a period of inflation, if its currency were not convertible. Finally, they both opposed large increases in the national debt and recommended redeeming the debt with a property tax after the end of the war. Would any Classical or Keynesian economists be so bold today? An earlier draft of this paper was presented at the universities of Padua, Venice, Western Ontario, and Saskatchewan.