WEBVTT NOTE Gold and the International Monetary System 1 00:00:00.000 --> 00:00:10.000 In my talk on gold and the international monetary system, I have chosen to focus on the works of an undeservedly obscure economist by the name of Michael A. Heilprin. 2 00:00:10.000 --> 00:00:14.000 There are, I feel, a number of compelling reasons for doing so. 3 00:00:14.000 --> 00:00:27.000 First and foremost, Heilprin was one of a tiny handful of professional economists after World War I to urge going back to a relatively hard-money classical gold standard. 4 00:00:27.000 --> 00:00:40.000 Second, while his contributions understandably were never greeted with great warmth by mainstream economists, he has also been inexplicably neglected even by Wall Street and other pro-gold economists. 5 00:00:40.000 --> 00:00:43.000 In some small way today, I wish to correct this oversight. 6 00:00:43.000 --> 00:00:53.000 Third, Halpern dealt with the whole broad range of issues involved with an international monetary system based on gold, and he did so from a basically Austrian perspective. 7 00:00:53.000 --> 00:01:23.000 Some of the Austrian themes in his writings include the insight that there is an automatic mechanism that ensures that national balances of payments are quickly and precisely adjusted by the market and also that a correct understanding of this mechanism can only be achieved by focusing on individual prices and individual incomes rather than on such misleading aggregates which we hear so much about like the national price level or the gross national product. That's an extremely Austrian insight. 8 00:01:23.000 --> 00:01:38.000 Halprin's writings also serve as an invaluable illustration that abstract, sound economic theory does provide an indispensable tool for accurately forecasting the broad effects on economic activities of government policies and institutions. 9 00:01:38.000 --> 00:01:44.000 But perhaps Halprin's most important contribution, and this I will focus on in my talk today, 10 00:01:44.000 --> 00:01:49.040 This is brilliant demolition of a long-standing legend to the effect that an international 11 00:01:49.040 --> 00:01:54.540 gold standard regularly imposes on a nation internal economic instability. 12 00:01:54.540 --> 00:02:01.480 That is, inflationary booms alternating with recessionary busts. 13 00:02:01.480 --> 00:02:07.080 So in what follows, I will more or less treat Milprin's masterful demonstration that the 14 00:02:07.080 --> 00:02:12.120 international gold standard is both internally and externally stable and that it is the inflationary 15 00:02:12.120 --> 00:02:28.200 As early as 1923, John Maynard Keynes declared that the choice of an international monetary 16 00:02:28.200 --> 00:02:32.880 regime involved a painful, unpleasant dilemma. 17 00:02:32.880 --> 00:02:38.240 Keynes argued that the operation of the mechanism by which international balances of payments 18 00:02:38.240 --> 00:02:47.240 are equilibrated or adjusted under the gold standard regularly and necessarily subjects a nation to bouts of inflation or deflation. 19 00:02:47.240 --> 00:03:00.240 This characterization of the gold standard appeared to be confirmed by events when in 1925 Britain reestablished convertibility of the pound and promptly experienced deflationary pressure on its economy. 20 00:03:00.240 --> 00:03:15.240 that Britain was only able to offset this pressure by a so-called autonomous monetary policy, or going off gold, in 1931, served as further evidence or proof of the correctness of Keynes' argument. 21 00:03:15.240 --> 00:03:27.240 For Halbron, however, the belief that the normal operation of the gold standard is inconsistent with domestic price stability is based on a number of serious errors of economic theory and historical interpretation. 22 00:03:27.240 --> 00:03:41.240 Thus Heilprin considers the dilemma more apparent than real, and I won't be quoting him liberally here, I won't stop to say that I'm quoting him, because it has its source in a rather oversimplified theory of the functioning of the gold standard. 23 00:03:41.240 --> 00:03:51.240 One of the most important aspects of this oversimplification involves the use of the concept of a national price level when discussing the functioning of the mechanism. 24 00:03:51.240 --> 00:03:55.240 And let me just quote a few sentences from Heilprin here because I think this is important. 25 00:03:55.240 --> 00:04:11.240 Such statistical constructions seem to provide a comfortable way out of the perplexing multiplicity and heterogeneity presented by the economic world and the processes that are taking place therein. 26 00:04:11.240 --> 00:04:20.240 But the multiplicity does exist, and by ignoring it, one falls into erroneous or meaningless statements about the world and about economic processes, 27 00:04:20.240 --> 00:04:27.740 averages more often conceal reality than reveal it, and have to be used cautiously, even in homogeneous collections. 28 00:04:27.740 --> 00:04:32.240 But they are simply without meaning in collections that are not homogeneous. 29 00:04:32.240 --> 00:04:34.240 More straightforwardly, Halpern goes on to say, 30 00:04:34.240 --> 00:04:38.740 There is no such thing in the real economic world as the general price level. 31 00:04:38.740 --> 00:04:44.240 But what exists are prices, and it is the movements of prices and the changes in the structure of money values, 32 00:04:44.240 --> 00:04:49.240 including incomes, prices and debts, that are of real interest and of intense importance 33 00:04:49.240 --> 00:04:53.240 and the Importance for the Understanding of Economic Phenomena. 34 00:04:53.240 --> 00:05:05.240 Thus, by conducting analysis in terms of national price levels, one is naturally led to conclude that what is required, for example in the case of a deficit, is a general deflation of the nation's price level. 35 00:05:05.240 --> 00:05:14.240 But this hides the fact that what is really needed to restore balance of payments equilibrium in a deficit situation, that is in a situation where gold is falling out of the country, 36 00:05:14.240 --> 00:05:21.240 is a decline of some particular prices, which hardly qualifies as deflation, but deflation in the usual sense of the term. 37 00:05:21.240 --> 00:05:30.240 More importantly, it is highly inappropriate to use the terms inflation or deflation in describing the adjustment process under an international gold standard. 38 00:05:30.240 --> 00:05:39.240 On this point, Heilperin approvingly refers to the path-breaking analysis of Friedrich Hayek, of whom we've heard a lot in the past two days. 39 00:05:39.240 --> 00:05:46.640 The key to Hayek's analysis is the insight that the adjustment of balance of payments disturbances, that is, surpluses and deficits, 40 00:05:46.640 --> 00:05:58.800 occurs via processes of changes in individual prices, incomes and expenditures, which extend throughout the world economy without regard to what nation the seller is located in. 41 00:05:58.800 --> 00:06:09.800 The magnitude and even the direction of the change of a particular good's price does not depend, therefore, upon the nation in which the good is offered for sale. 42 00:06:09.800 --> 00:06:23.800 Without really getting abstract, Hayek basically concludes that this microeconomic approach to the balance of payments analysis reveals how superficial and misleading the kind of argument is which runs in terms of the prices and the incomes of the country, 43 00:06:23.800 --> 00:06:50.800 There is a second aspect to Hayek's case against the use of terms like inflation and deflation to describe the effects of the international money flows that occur regularly under a gold standard. 44 00:06:50.800 --> 00:06:57.800 Now this derives from the fact that under the international gold standard, gold serves in effect as a world money or a world currency. 45 00:06:57.800 --> 00:07:07.800 And therefore, changes in the quantity of money in a particular nation have no more and no less significance than changes in the quantity of money in a particular state, city, or even household. 46 00:07:07.800 --> 00:07:14.800 The reason is that each of these units, including the nation, does not form an independent currency area, 47 00:07:14.800 --> 00:07:20.800 but is a constituent of the world currency area that employs gold as the general medium of exchange. 48 00:07:20.800 --> 00:07:32.800 So, barring a change in the world supply of gold, a net transfer of money from one nation to another will only occur in response to a relative change in the demand for money between the two nations. 49 00:07:32.800 --> 00:07:40.800 But the same is true today of a net transfer of dollar balances from one region within, let's say, the U.S. dollar area to another. 50 00:07:40.800 --> 00:07:44.800 In the latter case, we would hardly refer, let us say, to the loss of dollars in New Jersey 51 00:07:44.800 --> 00:07:48.800 and the acquisition of these currency units by the New York residents 52 00:07:48.800 --> 00:07:52.800 as constituting a monetary deflation or inflation. 53 00:07:52.800 --> 00:07:56.800 Thus, to assert that fluctuations in national stocks of money 54 00:07:56.800 --> 00:08:00.800 under the international gold standard constitute inflation and deflation 55 00:08:00.800 --> 00:08:04.800 is to confuse redistributions of money within one currency area 56 00:08:04.800 --> 00:08:08.800 that are components of a larger unified currency area 57 00:08:08.800 --> 00:08:34.800 In light of the foregoing considerations, Heilprin concludes that serious balance of payments disturbances requiring large and broad-based adjustments in a nation's price structure do not arise from the day-to-day operation of the gold standard, but from the attempts of government monetary authorities to frustrate such operations. 58 00:08:34.800 --> 00:08:43.800 In Halpern's words, in a free economy, the principal cause of a cumulative deficit in a country's international payments is to be found in inflation. 59 00:08:43.800 --> 00:08:55.800 Deficits due to rising domestic prices caused by monetary inflation are in turn exacerbated by outflows of short-term funds and the discouragement of long-term foreign investment 60 00:08:55.800 --> 00:09:05.800 as a result of widespread loss of confidence in the ability of the government to maintain convertibility of the domestic currency in the face of persistent deficits and gold outflows. 61 00:09:05.800 --> 00:09:11.800 Continued inflation under these circumstances leads to a breakdown of the gold standard and of exchange rate stability. 62 00:09:11.800 --> 00:09:17.800 So we get both internal and external instability, not from the gold standard, but from abuses of the gold standard. 63 00:09:17.800 --> 00:09:24.800 Thus it is not adherence to the international gold standard that imposes a sacrifice of domestic price stability on a nation. 64 00:09:24.800 --> 00:09:42.800 To the contrary, it is the pursuit of inflationary monetary policies leading ultimately to the abolition of the gold standard, which precipitates both internal and external instability in the form of an upward spiraling of domestic prices and the corresponding freefall of the national currency on the foreign exchange markets. 65 00:09:42.800 --> 00:09:49.800 The operation of the gold standard, when correctly understood, therefore poses no dilemma between internal and external stability. 66 00:09:49.800 --> 00:09:58.800 But what of the abnormal case in which a large domestic inflation has driven a government to repudiate its pledge to redeem the national currency in gold? 67 00:09:58.800 --> 00:10:06.800 Under these circumstances, doesn't the stabilization of the currency via the restoration of the gold standard require internal deflation of money and prices? 68 00:10:06.800 --> 00:10:13.800 And the U.S. is in this situation today. And Governor Part T addressed this question and I think gave the wrong answer to it. 69 00:10:13.800 --> 00:10:20.800 Under these circumstances, doesn't the stabilization of the currency, the answer is no to all this. 70 00:10:20.800 --> 00:10:25.800 All the monetary authorities need to do in this situation is to cease further inflation of the stock of money, 71 00:10:25.800 --> 00:10:30.800 and to then tie back onto gold at a devalued parity, or in other words, at a higher price of gold. 72 00:10:30.800 --> 00:10:41.800 In our case, estimates range from $500 to $1400 per ounce, which approximately does reflect the rate of inflation. 73 00:10:41.800 --> 00:10:54.800 And this, of course, is the policy that was advocated by Halperin. In fact, this was the course pursued by France under the Poincaré reforms of 1926 through 1928, which put France back on a gold standard. 74 00:10:54.800 --> 00:11:02.800 And in fact, France did not suffer any depression of economic activity or deflation of prices during this period. Prices were stable. 75 00:11:02.800 --> 00:11:15.800 On the other hand, England did, because they attempted to return to the gold standard at a price that tended to overvalue the pound by 10% and make England's goods uncompetitive on foreign markets. 76 00:11:15.800 --> 00:11:23.800 In short, the price of gold must be altered after an extended bout of fiat money inflation to ensure a smooth transition back to the gold standard. 77 00:11:23.800 --> 00:11:33.800 Once the gold standard is again normally operating, there is no further need to tamper with the gold parities to guarantee monetary stability throughout the world currency area. 78 00:11:33.800 --> 00:11:42.800 This brings us to the final objection to the international gold standard on the grounds of its alleged incompatibility with domestic macroeconomic stability. 79 00:11:42.800 --> 00:11:48.800 Granted that the normal operation of the gold standard secures tolerable long-run price stability in the world economy, 80 00:11:48.800 --> 00:12:02.800 Is it not still the case that it facilitates the international transmission of random shocks, such as increases in oil prices, or monetary errors originating in one particular nation, such as large inflations in South American countries? 81 00:12:02.800 --> 00:12:16.800 For example, a rise in prices generated by an abnormally expansionary monetary policy in a large nation will result in a balance of payment surplus and inflow of gold for a nation pursuing a relatively non-inflationary monetary policy. 82 00:12:16.800 --> 00:12:29.800 If it strictly adheres to the gold standard, the latter non-inflationary nation will be denied recourse to an autonomous or independent monetary policy to offset the inflationary impact on domestic crisis. 83 00:12:29.800 --> 00:12:42.800 Conversely, a contraction of economic activity abroad will generate a balance of payments deficit and loss of gold reserves for the nation in question due to falling off of demand for its products on depressed world markets. 84 00:12:42.800 --> 00:12:51.800 The resulting contraction of its money stock will create excess supply in the domestic goods market, thus depressing domestic prices, employment and real income. 85 00:12:51.800 --> 00:13:03.800 All this, we are told, by the monitors in particular, can be avoided at very little cost by the simple expedient of a freely floating national fiat currency, which the world is filled with today. 86 00:13:03.800 --> 00:13:10.320 Today. Under this monetary regime, when expansionary pressure is exerted on a nation from abroad, 87 00:13:10.320 --> 00:13:14.680 the exchange rate will simply float upward, obviating the need for balance of payments 88 00:13:14.680 --> 00:13:20.640 adjustments via inflation of domestic money and prices. Contrary-wise, foreign depressions 89 00:13:20.640 --> 00:13:25.640 will be stopped dead at the nation's borders, or so we are told, by a painless depreciation 90 00:13:25.640 --> 00:13:30.280 of the exchange rate, which substitutes for the grinding shrinkage of money, prices and 91 00:13:30.280 --> 00:13:33.280 and economic activity imposed by the gold standard. 92 00:13:33.280 --> 00:13:36.120 Now, Halperin raises two weighty objections 93 00:13:36.120 --> 00:13:37.880 to the seemingly impregnable case 94 00:13:37.880 --> 00:13:39.880 for fluctuating exchange rates. 95 00:13:39.880 --> 00:13:41.920 First, he contends that the national monetary 96 00:13:41.920 --> 00:13:44.920 and economic independence that is promised 97 00:13:44.920 --> 00:13:46.560 is far from costless. 98 00:13:46.560 --> 00:13:49.680 It is, in fact, purchased at the price of the breakup 99 00:13:49.680 --> 00:13:51.800 of the world currency area secured 100 00:13:51.800 --> 00:13:53.440 by the international gold standard, 101 00:13:53.440 --> 00:13:55.560 and also at the price of the loosening 102 00:13:55.560 --> 00:13:59.120 of the only effective anti-inflation restraint 103 00:13:59.120 --> 00:14:02.120 and Binding the Hands of National Monetary Authorities. 104 00:14:02.120 --> 00:14:04.120 And that is the gold standard. 105 00:14:04.120 --> 00:14:11.120 In Halpern's words, the real meaning of the gold standard is that it allows the various currencies to be freely converted to one another, 106 00:14:11.120 --> 00:14:15.120 and thus gives the best practical approximation to a world currency. 107 00:14:15.120 --> 00:14:19.120 Thus, the international gold standard minimizes the disturbing effects, 108 00:14:19.120 --> 00:14:25.120 which a plurality of national currencies can have upon international commercial and financial relations. 109 00:14:25.120 --> 00:14:33.120 In addition, the position of gold as the base of money and credit is the only way of ensuring against wide fluctuations in the value of currencies. 110 00:14:33.120 --> 00:14:42.120 And the sensitive response of the money supply to the flow of gold in and out of a country would be the most effective discipline on national economic policies. 111 00:14:42.120 --> 00:14:53.120 Now Halpern admits that there exists an abstract possibility of stable exchange rates and non-distorted trade and financial flows under a system of fluctuating exchange rates. 112 00:14:53.120 --> 00:14:58.120 However, the abstract model is not borne out by actual experience. 113 00:14:58.120 --> 00:15:02.120 This is certainly the lesson to be drawn from the 1930s. 114 00:15:02.120 --> 00:15:06.120 Admittedly, the world of the 1930s represents an extraordinary case, 115 00:15:06.120 --> 00:15:09.120 as governments struggled to export their unemployment problems 116 00:15:09.120 --> 00:15:12.120 and to reflate their economies out of the Depression. 117 00:15:12.120 --> 00:15:16.120 Nonetheless, with theoretical insight leavened by this historical experience, 118 00:15:16.120 --> 00:15:20.120 Heilbritt in 1952 was able to accurately foresee 119 00:15:20.120 --> 00:15:27.120 And finally, the broad outline of a world of fluctuating national fiat currencies, which we got 20 years later in 1973. 120 00:15:27.120 --> 00:15:31.120 Again, let me just read a few sentences from Heilbrunn here. He says, 121 00:15:31.120 --> 00:15:37.120 The freedom of action which individual countries, large or small, have in the absence of an international monetary system 122 00:15:37.120 --> 00:15:43.120 makes it possible to have a large number of national inflations going on simultaneously, differing in intensity 123 00:15:43.120 --> 00:15:48.120 and sheltered by exchange controls and import restrictions adopted by the respective governments. 124 00:15:48.120 --> 00:15:56.120 These simultaneous and concurrent national inflations are a characteristic feature of a world of independent currency systems, 125 00:15:56.120 --> 00:16:01.120 insulated from one another and protected by national full employment and development programs. 126 00:16:01.120 --> 00:16:07.120 In addition, and I think this is an extremely accurate forecast, coming as it did in 1952, 127 00:16:07.120 --> 00:16:15.120 habits of inflation become so widely accepted that inflation as a way of life comes to be regarded by many politicians and even economists, 128 00:16:15.120 --> 00:16:20.120 by economists, and I would say especially by economists, as entirely rational and acceptable. 129 00:16:20.120 --> 00:16:27.120 Now I submit that the foregoing is a much more accurate forecast of the outcome of the post-Bretton Woods system, 130 00:16:27.120 --> 00:16:30.120 or experiment with fluctuating exchange rates. 131 00:16:30.120 --> 00:16:36.120 Much more accurate than can be derived from the monetarist abstract model of exchange rates. 132 00:16:36.120 --> 00:16:42.120 According to the monetarist model, fluctuating exchange rates would lead to a decline in protectionism, 133 00:16:42.120 --> 00:16:48.000 is fewer tariffs, fewer quotas. As governments soon learned that they no longer need worry 134 00:16:48.000 --> 00:16:52.800 about their nation's external payments position, which is quickly and automatically adjusted 135 00:16:52.800 --> 00:16:56.920 by appropriate movements of the exchange rate. Moreover, we were advised that the world would 136 00:16:56.920 --> 00:17:02.000 attain a greater overall degree of macroeconomic stability since more sophisticated and prudent 137 00:17:02.000 --> 00:17:06.720 governments could now undertake independent monetary policies and would no longer be locked 138 00:17:06.720 --> 00:17:15.720 to automatically importing the consequences of errors and excesses in monetary policy committed by governments of lesser intelligence and self-restraint. 139 00:17:15.720 --> 00:17:18.720 I think the latter really characterizes all governments. 140 00:17:18.720 --> 00:17:25.720 While the monetary scenario is certainly one theoretically possible outcome of a fluctuating exchange rate system, 141 00:17:25.720 --> 00:17:31.720 it is certainly not the scenario that unfolds in the past decade since the breakdown of fixed exchange rates. 142 00:17:31.720 --> 00:17:46.720 In fact, the monetarist predictions come to grief precisely because they ignore, which Halpern does not, the sociological insight that governments are inherently inflationary institutions whose propensity to create money can only be curbed in practice by the gold standard. 143 00:17:46.720 --> 00:17:56.720 Furthermore, to camouflage highly visible and unpopular consequences of monetary inflation, such as higher import prices and continuously depreciating exchange rates, 144 00:17:56.720 --> 00:18:09.720 Governments can naturally be expected to resort to such expedience as pegging exchange rates at overvalued levels and placing restrictions on international trade investment, all of which was once again forecast by Halpern in 1952. 145 00:18:09.720 --> 00:18:25.720 Another feature of the current scene which the advocates of freely floating exchange rates failed to anticipate is the magnitude of the speculative flows of short-term funds generated by the uncertainty associated with the ever-present prospect of large and sudden changes in exchange rates, 146 00:18:25.720 --> 00:18:55.320 The absence of stable exchanges is a deterrent to long-term foreign lending, and as regards 147 00:18:55.320 --> 00:19:05.320 In short-term financial transactions, exchange fluctuations and their expectations are one of the most powerful incentives to speculation and to flights of capital. 148 00:19:05.320 --> 00:19:13.320 Besides facilitating inflation and subsequent recessions, and thereby promoting political barriers against international trade investment, 149 00:19:13.320 --> 00:19:17.320 fluctuating exchange rates reduce world income in two additional ways. 150 00:19:17.320 --> 00:19:26.320 First, speculative activities on the foreign exchange market absorb scarce resources that would otherwise be employed in productively serving consumers' demands. 151 00:19:26.320 --> 00:19:38.320 And second, the increased uncertainty associated with international commercial and financial transactions reduces their volume and creates distortions in their pattern from the point of view of comparative advantage. 152 00:19:38.320 --> 00:19:48.320 Now Halprin anticipated the well-known monetarist argument that the foreign exchange market provides facilities for hedging against exchange rate fluctuations. 153 00:19:48.320 --> 00:19:52.320 And he noted that in the long run, however, such hedging is of no avail. 154 00:19:52.320 --> 00:19:59.320 As regards current trade, this is a short-term transaction and therefore fairly immune to exchange fluctuations. 155 00:19:59.320 --> 00:20:05.320 However, the international division of labor and the regional and national specialization of production is a long-term proposition. 156 00:20:05.320 --> 00:20:27.320 Not only is the attempted inflation of the national economy through a policy of fluctuating exchange rates exceedingly costly, but it is a goal that can never be successfully achieved as long as the nation's residents are free to carry on any international economic relations whatever. 157 00:20:27.320 --> 00:20:42.320 Fluctuating exchange rates cannot ensure internal stability, although they may indeed stabilize some arbitrarily selected price index, because the country's internal price structure, or actual pattern of relative prices, is primarily determined by the world market. 158 00:20:42.320 --> 00:20:58.320 As a proponent of the Austrian theory of the business cycle developed by Mises and Hayek, Halpern emphasizes the key role of inflation-induced relative changes between the prices of capital goods and price of consumers' goods in precipitating business fluctuations. 159 00:20:58.320 --> 00:21:05.320 But a system of fluctuating exchange rates does not interfere with the international transmission of changes in relative prices. 160 00:21:05.320 --> 00:21:11.320 It merely neutralizes the external forces acting upon a given nation's absolute level of prices. 161 00:21:11.320 --> 00:21:41.320 Indeed, the free market proponents of freely floating exchange rates, that is, the monetarists, tirelessly proclaim that one of the greatest virtues of their scheme is that it does not preclude the international changes in relative prices, which are needed to induce a rearrangement of productive activities according to the ever-changing dictates of comparative advantage. So this can be used against them, in effect. This is precisely the reason, however, why the Austrians deny that fluctuating exchange rates can successfully insulate a nation from macroeconomic fluctuations generated abroad. 162 00:21:41.320 --> 00:22:03.320 For example, when the monetary authorities of a foreign nation of significant size inflate their national money supply, typically via the expansion of bank loans to businesses within their countries, the prices of capital or higher-order goods are bid up, not just in the inflating nation, but throughout the world economy, since commodity markets are internationally integrated. 163 00:22:03.320 --> 00:22:10.320 So the price of copper, for example, or of construction materials rises throughout the world in relation to other prices. 164 00:22:10.320 --> 00:22:25.320 The increase of capital goods prices and profit margins relative to consumers' goods prices and profit margins signals business firms in the relevant industries in all nations to expand the output of capital goods and contract the output of consumers' goods. 165 00:22:25.320 --> 00:22:30.320 The stimulus to capital goods production will continue until the inflation is brought to a halt. 166 00:22:30.320 --> 00:22:43.320 At that time, a reverse movement of inflation distorted relative prices occurs, and businessmen finally realize that many of the long-term investments made in the capital goods industry during the inflationary boom are unprofitable and must be liquidated. 167 00:22:43.320 --> 00:22:52.320 The revelation of these malinvestments and misallocations of productive resources coincides with the onset of a worldwide recession or depression. 168 00:22:52.320 --> 00:23:03.320 As long as it engages in international trade, therefore, a country will undergo a boom and bust cycle with a perfectly stable national price level, protected by floating exchange rates. 169 00:23:03.320 --> 00:23:12.320 Whenever there occur reversible relative price changes in world commodity markets that are the result of an inflationary boom engineered by one foreign monetary authority. 170 00:23:12.320 --> 00:23:19.320 So the alleged benefits of the system of fluctuating exchange rates purchased at the substantial cost of the demolition of the gold standard 171 00:23:19.320 --> 00:23:23.320 are thus turned out to be only a mirage of macroeconomic theorizing. 172 00:23:23.320 --> 00:23:27.320 You simply hold the price level constant, the national price level, 173 00:23:27.320 --> 00:23:30.320 and allegedly there are no effects from abroad. 174 00:23:30.320 --> 00:23:34.320 But again, as Austrians continuously emphasize, there are effects from abroad. 175 00:23:34.320 --> 00:23:37.320 Relative price effects, the price structure changes. 176 00:23:42.320 --> 00:23:46.320 While Halbron does not specifically identify the process by which business fluctuations 177 00:23:46.320 --> 00:23:49.320 are internationally transmitted, as I have done above. 178 00:23:49.320 --> 00:23:57.320 He is the only Austrian business cycle theorist to address the problem within the context of a world of open economies under a system of fluctuating exchange rates. 179 00:23:57.320 --> 00:24:01.320 And the broad conclusions of his investigation are clear-cut. 180 00:24:01.320 --> 00:24:06.320 Even in the absence, and I'm quoting him now, of an international monetary system, inflation, 181 00:24:06.320 --> 00:24:11.320 although primarily a domestic phenomenon of individual countries is far from being exclusively that. 182 00:24:11.320 --> 00:24:22.320 Even though various countries have independent monetary systems, inflation taking place in any one nation may have, and often does have, repercussions which go beyond that country's confines. 183 00:24:22.320 --> 00:24:26.320 This is especially true if the country experiencing inflation is an important economic unit. 184 00:24:26.320 --> 00:24:31.320 An economically important country, if it experiences inflation, can generate inflation elsewhere. 185 00:24:31.320 --> 00:24:36.320 The same is, of course, true of deflations, which follow upon the breakdown of the inflationary process. 186 00:24:36.320 --> 00:24:47.320 Process. Thus, even in the absence of an international monetary system, that is of an international gold standard, important economic units can transmit the virus of inflation to other countries. 187 00:24:47.320 --> 00:25:02.320 And by the way, only if we take Heilbrunn's view, can we explain the fact that the recessions, or more accurately, the depressions of 1973 through 1975 and 1980 through 1982 were not confined to any one country, but in fact, 188 00:25:02.320 --> 00:25:10.320 are world-wide phenomena, even though we did have quite quasi-floating exchange rates during that period. 189 00:25:10.320 --> 00:25:16.320 In effect, most currencies, important currencies, were floating against the dollar during those periods. 190 00:25:16.320 --> 00:25:22.320 Once again, we see that sound, Austrian economic theory yields more accurate economic forecasts 191 00:25:22.320 --> 00:25:27.320 than the allegedly more empirical and real-world theories of monetarist economics. 192 00:25:27.320 --> 00:25:40.320 In concluding, I would like to aim a mild criticism at Halperin, though we can be criticized very severely in other accounts, I won't get into it, in order to highlight an important point regarding the prospective transition to the gold standard. 193 00:25:40.320 --> 00:25:55.320 Halperin believed that the only way to restore the gold standard was to convene an international conference at which fixed gold parities for the various national currencies and the rules of the game to be followed by central banks were internationally agreed upon. 194 00:25:55.320 --> 00:26:02.280 Now this may have been possible in the 1960s when a tenuous link to gold still existed. 195 00:26:02.280 --> 00:26:05.960 Today I think that this would be a fatal error because the most likely result of such a new 196 00:26:05.960 --> 00:26:11.120 Bretton Woods would be precisely that, a new Bretton Woods, a fake or pseudo gold standard 197 00:26:11.120 --> 00:26:16.040 that must, as halberd and inexperience have taught us, collapse like a house of playing 198 00:26:16.040 --> 00:26:19.040 cards. 199 00:26:19.040 --> 00:26:23.280 All the old myths and wives tales regarding the instability of the gold standard would 200 00:26:23.280 --> 00:26:29.160 be upon us once again with a vengeance. The last best chance for a stable world monetary 201 00:26:29.160 --> 00:26:34.840 system would be lost for generations to come. So I think the call for a new Bretton Woods 202 00:26:34.840 --> 00:26:41.840 that has issued forth from the supply side camp must be decisively renounced by all troops 203 00:26:42.280 --> 00:26:47.280 advocates of a gold standard. And I was happy to see a Congressman Paul lead the way yesterday 204 00:26:47.280 --> 00:26:51.800 in this. The only safe and workable plan for restoring a gold money is for the U.S. government 205 00:26:51.800 --> 00:26:54.840 to unilaterally define the dollar as the weight of gold, 206 00:26:54.840 --> 00:26:58.520 regardless of what course other nations may take. 207 00:26:58.520 --> 00:27:00.660 Once said notes have been redeemed for gold 208 00:27:00.660 --> 00:27:04.080 and gold coin has gotten back into circulation in the U.S., 209 00:27:04.080 --> 00:27:07.060 other countries will be confronted with one of two choices, 210 00:27:07.060 --> 00:27:10.320 either to tie back onto an already functioning gold standard 211 00:27:10.320 --> 00:27:12.300 in an economically significant currency area, 212 00:27:12.300 --> 00:27:13.820 that is the U.S. economy, 213 00:27:13.820 --> 00:27:15.920 or to watch their respective fiat currencies 214 00:27:15.920 --> 00:27:18.120 continue to depreciate against the gold dollar 215 00:27:18.120 --> 00:27:20.760 and continue to suffer drains of capital 216 00:27:20.760 --> 00:27:36.760 from their Countries into the U.S. Economy. If they choose the former as they think they will, the international gold standard will begin to reemerge spontaneously without any political agreements. If they choose the latter, it's regrettable, but it will not make the U.S. gold standard any less viable.