I was a graduate of the University of Cambridge in England and there I studied under some of the leaders of Keynesian thought.
In fact, I didn't study under anybody who didn't believe in Keynesian thought between 1951 and 1954 at Cambridge.
My supervisors there were Joan Robinson who was a neo-communist, good friend of Rosa Luxemburg, the well-known conservative thinker.
Nicky Caldor was another supervisor of mine. Subsequently, he went on to become economic advisor to the Wilson Labor Government and managed to advise them as to how to put a few more coffins into the economy of the British Isles.
I was also supervised by Richard Kahn, who invented the multiplier theory for Keynes.
Richard Goodwin, an American economist, was on the lam from the McCarthy Committee.
It was not until very late in life that the names of Friedrich A. von Hayek and Ludwig
von Mises had much of an impact on my thought. I didn't find out about them in books. I found
out about them through bitter experience working as a journalist in a modern economy and presenting
myself as an opponent of government intervention in the economic life of my native land Australia.
That country suffers from a long tradition of protectionist economic policies and government
intervention on a grand scale. My criticisms of the government in the 1960s made them so
furious that they raided my house with 14 police, tried to have me incarcerated and
Unfortunately I was managed to sue the Commonwealth Government of Australia for having invaded
my premises with an illegal warrant and won what became a landmark victory for personal
freedom in Australia. So I know from personal experience that governments get very nasty
when you try to stop them pushing you around.
And really through a long experience of dealing with bureaucrats
and politicians in my life as a journalist over 25 years,
I found out in a very practical way
how valid are the views of people like
von Hayek and von Mises.
I quote, I was reading the little booklet that was given out today with the papers for
this conference and I have this quote here from von Hayek where he said, sometimes I
have feared that liberty is only valued when it is lost and I can tell you when the police
freedom becomes very, very valuable.
I think that there must be a lot of other people like myself who are brought up in an ingrained tradition of Keynesian thought
and who found out about people like von Hayek, von Mises and also Milton Friedman
through one's life experience of finding out what governments are capable of doing
and what central banks are capable of doing.
And there is no greater example of the damage to personal freedom, to economic freedom and to economic stability than what we have seen in the last 15 years in this country,
where there has been a social revolution in the United States. It was called the Great Society.
As a result of this revolution, a new class of Americans was created, a class of almost 65 million dependent Americans.
Adding the number of civilian government employees to this total, we reach a grand total of just short of 79 million Americans today who live on a government check.
The number of non-government civilian employees in this country is approximately 83 million.
So we have now reached the astounding situation in America where the number of non-government workers is approximately equal to the number of government employees and other dependent Americans, one for one.
This revolution has been largely accomplished in the last 20 years and the most virulent revolutionary phase has occurred in the last 15 years.
Let me summarize a few numbers with which you are all no doubt familiar.
In the twenty-three years between 1960 and 1983, total government outlays, federal, state and local in this country, rose to eight and a half times their 1960 level.
Over the same period, gross national product, less government outlays, rose about five times.
So in the broad, government outlays have risen almost twice as fast as non-government part of gross national product.
The rate of advance of government outlays accelerated mightily during the 1970s.
Five years ended in 1965, 34% increase. Five years ended in 1970, 68%.
Five years ended in 1975, 63%. Five years ended in 1980, 80% increase in government outlays in five years.
The driving force in this fantastic explosion of government outlays was federal transfer payments.
Between 1964 and 1983, total federal government outlays rose nearly six times, but federal transfer payments rose over eleven times.
In order to finance this unprecedented change in the nature of the allocation of after-tax
incomes in the United States, it was necessary to resort to inflationary finance. It was
necessary because taxpayers in the United States would not count on increases in rates
The Age of Inflation was the result of an attempt to bring about a social revolution
in the United States against the will of the taxpayers of the United States. Two main sources
The first was Brackett Creek, which allowed major unlegislated increases in the rates of taxation to occur, and the second was a confiscation of wealth in the form of financial assets.
To give you a couple of examples, the Dow-Jones bond index in terms of 1977 prices fell by
more than one half between January 1977 when Jimmy Carter came to power and January 1981
when Ronald Reagan came to power. Between 1975 and 1983, the real value of the Dow-Jones
industrial average fell by about one quarter. There was a major confiscation of wealth in
the form of financial assets. That and bracket creep were the two means used to make an obligatory
change in the allocation of incomes and wealth in this country.
Between 1965 and 1980, the proportion of gross national product absorbed by Federal
Government transfer payments rose from 4.5% to 13%.
Between 1960 and 1980, the number of dependent Americans and Government employees rose from
from 37.9 million to 78.9 million. There were 40 million more dependent Americans and government
employees in 1980 than there were in 1960. I would call that a socialist revolution in
a so-called free country. In all these revolutionary changes involving
and Confiscation of Wealth, Hidden Taxes on Income and the Creation of a New Class of
Dependent Americans, the Central Bank played a vitally important role. Without the active
cooperation of the Central Bank in fostering inflation, this social revolution could not
have occurred. It could not have occurred because without the veil of inflation, the
The stark reality of the diversion of wealth and income to a new class of dependent Americans
would not have been supportable. It could only be achieved by stealth. The need to raise
taxation by overt legislative action involving large increases in rates of taxation would
have imposed impossible strains on the political process.
For most of the last 15 years, the Federal Reserve has been able to hide its actual intentions
by adopting a policy of so-called interest rate targeting. The Federal Reserve was able
to suggest its good intentions by presenting its policy target as that of holding down
interest rates during a period of endemic inflation. Rather than follow the path of
of Mummitary Aggregate Targeting, the Central Bank adopted the policy of interest rate targeting.
This meant in effect that the Federal Reserve maintained a permanent policy posture of accommodation
of cash.
The accommodative stance of the Federal Reserve became most overt under Arthur Burns, who cooperated
The need for urgent provision of super-abundant money during the run-up to the 1972 and 1976 elections dominated Bern's policy requirements.
Burns policy led to a strong expansion of money during 1970-73 and 1976-79. The need
for urgent provision of super-abundant money during the run-up to the 1972 and 1976 elections
dominated Burns policy requirements. Paul Volcker provided another huge burst of liquid
funds for the run-up to the 1980 elections. During the whole of the period of the 1970s,
the Federal Reserve fought tooth and nail against a formal system of monetary targeting.
It's not surprising that this should have been so. The Federal Reserve was intimately
involved in the political process of social revolution in the 1970s. Burns and G. William
William Miller were both deeply committed to the presidents they served, Nixon and Ford,
and Volcker is a lifetime bureaucrat who wants to please his bosses. As an aside it may seem
strange to you as you look at all the various different M's that we have these days, we've
The reason for the invention of these M's was an attempt by the Federal Reserve to pull the wool over the eyes of those, notably the Congress, who wanted to impose a system of monetary targeting.
In March 1975, as you're all very well aware, there was a resolution passed called House Concurrent Resolution No. 133,
which required the Federal Reserve to set up annual monetary targets and to abide by those targets.
The Federal Reserve officials got around that in two ways.
One, they invented a diversity of targets so that at any given time they could say, well, we hit that one.
And then they proceeded to change the base period. First of all they did it every quarter, then they did it every six months, then they did it every year, and now they do it every now and again when it's convenient.
And we had one of those just recently.
So the Federal Reserve officials have used their talents, their knowledge and their will to evade any attempt by Congress to require them to have what would be described as a reasonably responsible monetary policy.
Policy, which can be judged by objective criteria.
The effects of the policy of inflationary finance in the United States were felt worldwide.
An important part of the policy of enforced transfers of resources and income inside America
was the need to depreciate the American currency in its international aspect.
In 1971 and 1980, the trade-weighted value of the United States dollar fell from about
125 to about 85, a decline of about 30 percent in the relative value of the world's most
important currency. The effect of this huge depreciation of the US dollar was to spread
the inflationary incubus throughout the world financial system. In this way, the foundations
were laid for the current crisis of the debts of the LDC countries. I believe that that
crisis originated from the failures of domestic United States policy. Due to the policies
of the Federal Reserve in administering and reinforcing the New Deal controls over interest
rates and the financial markets generally in the United States, it was less and less
open to the American banks to make profitable loans inside the United States. Hence they
were obliged to expand their operations internationally. After all, in 1978, by which time the price
level in this country had doubled since 1968, five-year treasury bonds were still showing
The American banks experienced a huge flood of deposits from overseas. Naturally, they weren't going to lend that out at some ridiculous rate of interest inside this country, so they went around the world trying to find places where they could lend it, and they lent it to these so-called sovereign debtors, including
The Federal Reserve administered a structure of controls over interest rates,
These interest rate controls, in an environment of spiralling inflation, were of course part and parcel of the policy of attempting to hide the true costs of inflation.
These true costs were hidden by manipulating interest rates, the effect of which was to rob depositors and lenders of their wealth.
In the process, the Federal Reserve almost succeeded in bankrupting the entire savings and loan and savings bank industry in this country.
The bankruptcy of those industries was avoided only by a hair spread in 1981.
It was the Federal Reserve controls over domestic interest rates inside the United States
that stimulated the flood of US bank loans to LDC countries.
Consequently, I believe that one additional result of the United States Federal Reserve policy during the 1970s was to set up LDC countries for bankruptcy.
And those countries now are going through a tremendously painful process of adjustment, which will take them some years.
They were in effect like borrowers who suddenly find that they've got unlimited access to easy money.
They went on a spree, quite understandable, the money was being pushed down their throats.
There was no possibility of them being able to repay that money, nor is there any possibility of it.
300 billion of those LDC loans are not repayable and will not be repayable for years, if ever.
However, due to the efforts of governments in these LDC countries,
In all of these ways, the United States policy has contributed to
an economic disaster and a social and political disaster throughout Latin America and in many
East European countries. Fortunately, there is a ray of hope due to the operation of free
Money Markets in the United States. As the 1970s wore on, interest rates started to rise.
As the money illusion lifted, for years, the American financial markets suffered from a
money illusion. As I said, by 1978, you were still only getting 7% on a 10-year US bond.
But between 1978 and 1981 this money illusion just lifted and stark reality started to impose
itself on the thinking of the financial markets who had gone on for 10 years during a period
of doubling of the price level in the United States without any significant rise in interest
rates at all.
Anyway, as the money illusion lifted, the participants in the financial markets in the United States came to realize the full extent of the disaster that was occurring. Attempts to protect themselves were initiated by lenders. It's astonishing how long it took the financial markets to wake up.
The most important development aimed at mitigating the rape of wealth holders was the development
of the money market mutual funds. That was a tremendously important development which
began the counter-attack by the financial markets against the destruction that was being
In 1978 there were $6.4 billion invested in these money market mutual funds. In 1979 there was $33.4 billion. In 1980 $61.4 billion. In 1981 $150.9 billion and in 1982 $182.2 billion.
The force of the explosion of these money market mutual funds started the process of breaking down the whole structure of Federal Reserve control over interest rates and laid the foundations for the deregulation of the financial markets which we are now seeing spreading like wildfire.
Once the money market mutual fund steamroller got going, it was clear that the days of Federal Reserve controls over interest rates were ending.
This in turn laid the foundations for what I have called the revolt of the financial markets.
Since 1981 we have seen unprecedented real interest rates in the United States.
In 1981 I think we had something like a 12% rate on a 30-year US bond and we had something like 10%, 9% or 10% inflation.
In 1983, we've still got nearly a 12% nominal yield on a 30-year US bond, and we've got 3 or 4% inflation.
The financial markets have revolted, and you can almost hear the participants in the financial markets of this country saying never again.
Well, that will remain to be seen how many years will pass before they have the wool pulled over their eyes again.
For the moment, the money illusion has completely disappeared, to be replaced by a deep-seated
suspicion and scepticism in the financial markets.
This revolt of the financial markets is a powerful deterrent to the use of Federal Reserve
power.
This was clearly shown during 1982-83, the most recent example, and the most vivid example
The Federal Reserve began a major expansionary monetary policy, which led to a rise in money
M1 of about 13% between July 1982 and June 1983. The initial reaction of the financial
to that big, very big input of liquid funds by the Federal Reserve beginning in July was to rise bond futures and therefore drop interest rates quite sharply.
And between July and October of 1982 bond futures rose quite sharply, but by October of 1992 it was all over.
And in October of 1983 bond futures are no higher than what they were in October of 1982.
The period during which the financial markets were prepared to go along with an expansionary policy of the Federal Reserve
was very short, in this case it was three months as far as the bond futures markets were concerned.
I think that is a very encouraging development as the effect of that was to limit the extent
to which the Federal Reserve could continue to pursue that expansionary policy. The policy
continued until about April of 1983 when all growth in the banks reserves ceased. But by
By that time, interest rates had started to rise and it was quite obvious that the financial
markets were not going to countenance a continuation of the expansionary Federal Reserve policy
at the nominal interest rates that applied when that policy was initiated.
I can think of no more remarkable example of the success of free markets in holding
Inflation and in frustrating the intentions of an irresponsible central bank and the experience
of the revolt of the financial markets in the United States in the last three years.
Admittedly, it is not a very strong basis on which to base one's hopes of stable money
and of a limit on the proclivities of politicians, but it is the best thing that we have got
at the moment. Subsequent deregulation of the financial markets in the United States
has reinforced the process of liberation, making it more difficult for the Federal Reserve
to repeat its disastrous policies of the 1970s. The damage that has resulted from the experience
The capital structure of the United States has been eroded. Savings have been reduced, and those that have been made have been wasted. Unemployment has been raised to extreme levels. The prospect of economic growth for the United States is very limited, due to the shortage of savings and the reluctance of the financial markets to permit any reduction in real interest rates.
I'd just like to conclude by making a couple of points about our current situation.
As of now, after one year of economic recovery, the United States real gross national product is about 6% greater than what it was in 1978.
Between 1968 and 1978, real U.S. gross national product rose about 50%.
Since 1978, it's risen about 6%.
This country is stuck.
What are the prospects of further expansion?
The Federal Reserve has initiated a policy of monetary restriction since last June, which I believe will bring about an end to economic expansion in 1984 and possibly leading into 1985.
So I can imagine the situation where in 1985 the real gross national product of the United States might be 10% greater than what it was in 1978.
As far as the rest of the world is concerned, Latin America is in such a state of economic confusion and destruction that it will take several years for that group of nations to get back to where they were in about 1980.
As far as Western Europe is concerned, while the United States real GNP between fourth quarter 82 and fourth quarter 83 might go up by 6%, in Western Europe it's gone up by about 2%.
During the period of the age of inflation, I remember I had lunch with Rupert Murdoch and dinner with Rupert Murdoch in 1978, while this was going on, and Rupert said to me, well, you know, what's going to happen after all this?
And I said, I think it would be wrong to believe that you're going to be able to get out of a mess, a disaster, of these proportions without a very long period of pain.
Well, so far there's been five years of negligible economic growth in this country, the longest period of negligible economic growth for fifty years.
and that negligible economic growth is quite likely going to persist for another couple of years
while the economic and financial system of this country tries to readjust to the disaster that has occurred.