Though he’s correctly reviled today for his views on government involvement in the economy, John Maynard Keynes knew money, and he knew it well. To read his “Tract on Monetary Reform” is to believe that if he were alive, he would clearly understand the negative sentiment that holds sway over the American economy. Indeed, his “Tract” in many ways predicted what we’ve experienced amidst the dollar’s fall.

Polls presently show that Americans as a whole are unhappy and feel uncomfortable about the economic outlook. According to Keynes, economies “cannot work properly if the money, which they assume as a stable measuring-rod, is undependable.” Keynes went on to write that, “the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer — all proceed, in large measure, from the instability of the standard of value.”

Be it a strong dollar or a weak dollar, changes in the value of money enervate the citizenry most by redistributing wealth. Keynes wrote that “when the value of money changes, it does not change equally for all persons or for all purposes.” Sure enough the falling dollar of recent years has enriched those long on land, precious objects and commodities all at the expense of the saver and to a high degree, the investor.

Stocks have certainly done well in stretches since the summer of 2001, when the dollar began its decline, but the annualized total return on the S&P 500 since that time has been unimpressive to say the least. When we look at the dollar’s impressive fall versus currencies and gold over the same timeframe, we see that investors have actually lost quite a lot in real terms.

Keynes asked if the public could work around currency debasement and noted that “It has only one remedy, to change its habits in the use of money.” As he found, individuals eventually “discover that it is the holders of notes who suffer taxation,” so rather than hoarding currency that is declining “they spend this money on durable objects, jewelry or household goods.” And as we’ve seen in recent years, rich and poor alike have hedged their dollar wealth with purchases of homes, art (Sotheby’s shares are up over 100% since 2001), and jewels, and have borrowed against the commodity-like rise in the prices of their homes to fund all manner of improvements to same.

Keynes added that individuals “can reduce the amount of till-money and pocket-money that they keep and the average length of time for which they keep it,” and that of course helps to explain the heavy consumption versus saving that we’ve witnessed. Lastly, “they can employ foreign money in many transactions where it would have been more natural and convenient to use their own.” Supermodel Gisele Bundchen’s primary address is New York City, but in response to dollar weakness she’s asked that her modeling fees be paid in euros.

Currency weakness as mentioned benefits those who hold commodities such as homes, and as Keynes found, when money is losing value, “anyone who can borrow money and is not exceptionally unlucky must make a profit.” Rising prices often lead to expectations of further gains in these scenarios, so as Keynes noted, the “practice of borrowing from banks is extended beyond what is normal.” Much as we saw the rise of “day traders” during the strong-dollar driven equity boom of the late 1990s, in more modern times we’ve seen the rise of part-time real-estate investors who rode the property boom of this decade. When it comes to conducting business, the changing value of money naturally affects commercial health, and as will become apparent, the reputation of businesses seeking profits. On declining money values, Keynes wrote that when “the value of money falls, it is evident that those persons who have engaged to pay fixed sums of money must benefit, since their fixed money outgoings will bear a smaller proportion than formerly to their money turnover.” That’s the good part, and stocks certainly showed strength, aided by timely cuts in dividend/capital gains taxes, for a time in the aftermath of the dollar’s decline that began earlier in this decade.

Where problems arise is that only monetary disturbance can change the broad price level, and with the dollar’s fall, profits, particularly those earned by companies that would more likely benefit from a falling currency, were called into question. Keynes witnessed this in the inflationary aftermath of World War I in England, and his insight was that falling money values not only discourage investment, but the money debasement “also discredits enterprise.”

His words ring true when we consider the reputational hit that American oil companies have experienced alongside the dollar’s fall and oil’s rise. Just as they were forced to do in the 1970s when the dollar was weak, oil-company executives have twice been brought before Congress to explain their allegedly ill-gotten gains.

Keynes added that various remedies are thought up “to cure the evils of the day” wrought by cheap money, and he listed “subsidies, price and rent fixing, profiteer hunting, and excess profits duties.” Sure enough, Congress has passed the aforementioned stimulus package to subsidize the earnings of low-income Americans, the Treasury has foisted a “voluntary” rate freeze on “predatory” lenders, ExxonMobil executives remarkably seek to downplay the company’s profits, and Congress has resurrected the “windfall profits tax” from the failed policy playbooks of the 1970s.

And when we scrutinize the price of oil more closely, we ask why it is that producers don’t flood the markets with more oil to capture dollar profits while the price remains high. At first glance their actions (or lack thereof) may seem odd, but with the price of oil very much driven by the value of the dollar, we better understand why oil producers are reluctant. As Keynes wrote, “a general fear of falling prices may prohibit the productive process altogether.” Looked at in oil terms, producers are well aware that the dollar’s fall could eventually be arrested, and if so, they might hold oil that would have to be sold at a loss.

If Keynes were alive today, but unaware of the dollar’s direction, he might ask why President Bush suffers such low approval ratings, why Americans are so downcast about the economy, and why markets are so uncertain despite tax rates that are historically low, trade that is mostly free, and a war that, while unfortunate as all are, is being conducted continents away from us. His curiosity would be well placed, but easily explained by him once made aware of the falling dollar.

As Keynes so famously wrote, “There is no subtler, surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.” We know what ails us, and it’s the falling dollar. If we halt its decline, spirits will improve as they always do when we strengthen and stabilize the value of the money we earn.

Mr. Tamny is editor of RealClearMarkets, and a senior economist with H.C. Wainwright Economics. He can be reached at jtamny@realclearmarkets.com.