WEBVTT NOTE Keynesianism and World Inflation 1 00:00:00.000 --> 00:00:09.000 One of Keynes' closest followers, Seymour Harris, once stated that the gold standard was Keynes' vet-noir, his black beast. 2 00:00:09.000 --> 00:00:15.240 Another economist, an anti-Keynesian and a pro-gold standard economist, coined a term for Keynes. 3 00:00:15.240 --> 00:00:18.520 He called him a chrysophobe, a gold hater. 4 00:00:18.520 --> 00:00:22.520 When I started to write this paper, I approached this in a little bit different way. 5 00:00:22.520 --> 00:00:29.160 What I was going to do is describe Keynes' numerous plans for monetary reform, really for getting rid of gold. 6 00:00:29.160 --> 00:00:31.440 He had many different ways of trying to get rid of it. 7 00:00:31.440 --> 00:00:33.240 And then criticize him. 8 00:00:33.240 --> 00:00:38.720 But instead of doing that, what I want to do is to focus on Keynes' chrysophobia. 9 00:00:38.720 --> 00:00:42.760 Go behind it and show you the underlying reasons for it. 10 00:00:42.760 --> 00:00:48.280 These reasons really lie in the fact that Keynes was what is called a millennialist. 11 00:00:48.280 --> 00:00:53.600 Someone who believed that we were on the dawn of a new age, 12 00:00:53.600 --> 00:00:56.280 a new age of non-scarcity, 13 00:00:56.280 --> 00:01:02.320 and that he was going to be the profit that would lead us into this promised land of superabundance. 14 00:01:02.320 --> 00:01:05.720 So, the purpose of my talk is really threefold. 15 00:01:05.720 --> 00:01:09.600 First, to put Keynes' chrysophobe in perspective. 16 00:01:09.600 --> 00:01:17.640 Secondly, to challenge the commonly accepted view that Keynes' professional life can be divided into three periods. 17 00:01:17.640 --> 00:01:26.120 In the first period, from around 1913 to 1923, he was supposedly a liberal internationalist who was pro-gold, pro-free trade, 18 00:01:26.120 --> 00:01:29.120 and believed in international movements of capital. 19 00:01:29.120 --> 00:01:34.120 From 1923 to about 1943 or so, 20 00:01:34.120 --> 00:01:41.120 Keynes supposedly became increasingly more nationalistic in his economic policies. 21 00:01:41.120 --> 00:01:46.120 And then finally, supposedly, for various reasons, no one knows the exact reason, 22 00:01:46.120 --> 00:01:51.120 he allegedly recanted his anti-free trade heresy in 1943 23 00:01:51.120 --> 00:02:01.120 and became a monetary internationalist with his famous or infamous plan for a world central bank and a world currency called Bancorp. 24 00:02:01.120 --> 00:02:09.120 Well, this whole division, this whole way of approaching it really focuses on the wrong thing. 25 00:02:09.120 --> 00:02:20.120 Keynes would use any method, whether it be nationalistic or international, to try to rid the world, well first England and then the world, if he could, of the gold standard. 26 00:02:20.120 --> 00:02:26.920 Standard. So what I'll argue is really, he was not a liberal internationalist ever, he was always a 27 00:02:26.920 --> 00:02:37.320 millennialist to some extent, okay, and let me, since this is sort of a strong charge, initially 28 00:02:37.320 --> 00:02:42.920 I'm going to give you some quotes from two very important articles, which economists don't tend 29 00:02:42.920 --> 00:02:48.480 to read, they tend to gloss over. One was written in 1930 and it's called the economic possibilities 30 00:02:48.480 --> 00:02:53.480 The Second was written in 1933, and it was called National Self-Sufficiency. 31 00:02:53.480 --> 00:02:57.480 So I'm going to be drawing these quotes from these two articles. 32 00:03:02.480 --> 00:03:06.480 Cain's millennialism and his chrysophobia, his anti-gold mentality, 33 00:03:06.480 --> 00:03:12.480 is really explained at a very deep level by his peculiar view of the economic problem. 34 00:03:12.480 --> 00:03:17.480 He believed that the economic problem of scarcity, that is the fact that there's not enough resources 35 00:03:17.480 --> 00:03:23.480 for us human beings to have all that we want, is really not the permanent problem of the human race. 36 00:03:23.480 --> 00:03:29.480 In fact, he strongly believed that that problem of scarcity, of people not having enough, 37 00:03:29.480 --> 00:03:34.480 was going to be solved within two to three generations, within a hundred years. 38 00:03:34.480 --> 00:03:41.480 Let me give you one of his quotes on this. He proceeds as follows. 39 00:03:41.480 --> 00:03:47.080 I draw the conclusion that assuming no important wars and no important increase in population, 40 00:03:47.080 --> 00:03:54.780 and I might add here, he was in favor of population control, both in the form of quantity control and quality controls of the population. 41 00:03:54.780 --> 00:03:58.480 He never really went into that, and he detailed them. 42 00:03:58.480 --> 00:04:05.980 And no important increase in population, the economic problem may be solved or be at least within the sight of solution within a hundred years. 43 00:04:05.980 --> 00:04:11.980 This means that the economic problem is not, if we look into the future, the permanent problem of the human race. 44 00:04:11.980 --> 00:04:14.980 Okay, what was the permanent problem of the human race according to Keynes? 45 00:04:14.980 --> 00:04:23.980 Well, according to Keynes, the permanent problem was how to use the freedom from scarcity, which would arrive in two to three generations, 46 00:04:23.980 --> 00:04:29.980 the freedom from pressing economic cares, how to occupy the leisure, which science and compound interest, 47 00:04:29.980 --> 00:04:33.980 which is due to continuing capital accumulation, which Keynes believed in, 48 00:04:33.980 --> 00:04:38.980 have one for man, to live wisely and agreeably and well. 49 00:04:38.980 --> 00:04:43.980 Interestingly, Keynes believed that one segment of the population 50 00:04:43.980 --> 00:04:46.980 was right on the verge of entering the millennium. 51 00:04:46.980 --> 00:04:51.980 Upper class British housewives were already facing this permanent problem. 52 00:04:51.980 --> 00:04:56.980 That is, what to do with all their time and all their resources. 53 00:04:56.980 --> 00:05:02.740 And Keynes claimed that they failed to face the problem correctly 54 00:05:02.740 --> 00:05:07.220 and he explained nervous breakdowns among British upper class women 55 00:05:07.220 --> 00:05:10.020 as the failure to solve this problem. 56 00:05:10.020 --> 00:05:11.980 Now, okay. 57 00:05:11.980 --> 00:05:15.460 Right, so it's not having enough to eat, 58 00:05:15.460 --> 00:05:19.060 but it's not knowing what to do with one's time and having nervous breakdowns. 59 00:05:19.060 --> 00:05:23.380 It's going to be a permanent problem. 60 00:05:23.380 --> 00:05:33.380 Now, Keynes, in some sense, this is Keynes' most praxeological article, this article on the possibilities for our grandchildren, 61 00:05:33.380 --> 00:05:39.380 in the sense that he understands that scarcity leads to a number of things, including human purpose, 62 00:05:39.380 --> 00:05:43.380 and that when people act purposefully, they look to the future. 63 00:05:43.380 --> 00:05:49.380 That is, they exhibit time preference, and that as a result of time preference is an interest rate. 64 00:05:49.380 --> 00:06:06.380 And as a result of an interest rate and future wants pressing on our resources, we resort to financial accounting and opportunity costs to make sure that we're not using our resources in a way that will give us something less valuable now and giving us something more valuable in the future. 65 00:06:06.380 --> 00:06:14.380 Well, Keynes hated all of these things, including, and most deeply, human purpose. 66 00:06:14.380 --> 00:06:16.380 Let me, this is really incredible. 67 00:06:16.380 --> 00:06:29.380 First of all, he says that the strenuous purposeful money makers may carry us, may carry all of us along with them into the lap of economic abundance, into the millennium. 68 00:06:29.380 --> 00:06:39.380 But once we got there, he went on to say, yeah, there are changes in other spheres. 69 00:06:39.380 --> 00:06:44.620 Okay, prior to the hatred of human purpose, he understood that the market economy itself was a response to scarcity. 70 00:06:44.620 --> 00:06:50.220 And since scarcity was about to die out, he believed that the morals of the market 71 00:06:50.220 --> 00:06:55.900 and the various rules of conduct of the market were about to disappear, and he looked forward to it gleefully. 72 00:06:55.900 --> 00:07:00.620 Here he says, there are changes in other spheres, too, which you must come to expect. 73 00:07:00.620 --> 00:07:06.940 When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. 74 00:07:06.940 --> 00:07:13.380 We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for 200 years, 75 00:07:13.380 --> 00:07:18.980 by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. 76 00:07:18.980 --> 00:07:24.020 We shall be able to afford to dare to assess the money motive at its true value. 77 00:07:24.020 --> 00:07:29.220 The love of money as a possession will be recognized for what it is, a somewhat disgusting morbidity, 78 00:07:29.220 --> 00:07:32.900 one of those semi-criminal, semi-pathological propensities, 79 00:07:32.900 --> 00:07:37.200 which one hands over with a shudder to the specialists in mental disease. 80 00:07:37.200 --> 00:07:43.000 So all of these morals and so on would merely be aspects of a mental disease once we reach the millennium. 81 00:07:43.000 --> 00:07:47.300 And he looked forward to them disappearing. 82 00:07:47.300 --> 00:07:50.300 Now we get to purpose and the other things that he hated. 83 00:07:50.300 --> 00:07:53.400 Of course, there will still be many people, this is once we were in the millennium 84 00:07:53.400 --> 00:07:56.800 and we're trying to decide all our time and resources. 85 00:07:56.800 --> 00:08:01.300 Of course, there will still be many people with intense, unsatisfied proposiveness 86 00:08:01.300 --> 00:08:06.020 who will blindly pursue wealth unless they can find some plausible substitute. 87 00:08:06.020 --> 00:08:10.900 But the rest of us will no longer be under any obligation to applaud and encourage them. 88 00:08:10.900 --> 00:08:16.500 For we shall inquire more curiously than is safe today into the true character of this 89 00:08:16.500 --> 00:08:22.420 proposiveness, in parentheses and quotation marks, with which in varying degrees nature has endowed 90 00:08:22.420 --> 00:08:27.460 almost all of us. For proposiveness means that we are more concerned with the remote future results 91 00:08:27.460 --> 00:08:40.460 The propulsive man is always trying to secure a spurious and delusive immortality for his acts by pushing his interest in them forward into time. 92 00:08:40.460 --> 00:08:43.460 In other words, the attacking purpose and time preference. 93 00:08:43.460 --> 00:08:46.460 And, of course, we know interest arises from time preference. 94 00:08:46.460 --> 00:08:48.460 He goes on and he says, 95 00:08:48.460 --> 00:08:54.860 I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue, 96 00:08:54.860 --> 00:09:02.140 that avarice is of vice, that the exaction of usury is a misdemeanor, and the love for money is attestable, 97 00:09:02.140 --> 00:09:07.700 that those walk most truly in the paths of virtue and sane wisdom, 98 00:09:07.700 --> 00:09:10.300 I mean, this is the Messiah talking here, 99 00:09:10.300 --> 00:09:12.300 who take least thought for the morrow. 100 00:09:12.300 --> 00:09:16.260 We shall once more value ends above means and prefer the goods of the useful. 101 00:09:16.260 --> 00:09:21.760 We shall honor those who can teach us how to pluck the hour and the day virtuously and well. 102 00:09:21.760 --> 00:09:25.260 The delightful people who are capable of taking direct enjoyment in things. 103 00:09:25.260 --> 00:09:28.760 The lilies of the field who toil not, neither do they spin. 104 00:09:28.760 --> 00:09:37.760 In other words, he was completely against purposeful human behavior, which is underlayed by plans and so on. 105 00:09:37.760 --> 00:09:44.260 Well, to hasten the onset of this millennium, Keynes wished to push the interest rate down towards zero. 106 00:09:44.260 --> 00:09:48.820 to hasten capital accumulation and investment. 107 00:09:48.820 --> 00:09:52.340 And he's very forthright about this. 108 00:09:52.340 --> 00:09:57.460 He goes on in the article on national self-sufficiency, as I mentioned. 109 00:09:57.460 --> 00:10:02.020 But I have become convinced that the retention of the structure of private enterprise 110 00:10:02.020 --> 00:10:04.740 is incompatible with that degree of material well-being 111 00:10:04.740 --> 00:10:07.700 to which our technical advancement entitles us, 112 00:10:07.700 --> 00:10:10.340 unless the rate of interest falls to a much lower figure 113 00:10:10.340 --> 00:10:13.060 than is likely to come about by natural forces. 114 00:10:13.060 --> 00:10:17.800 Indeed, the transformation of society, which I preferably envisage, 115 00:10:17.800 --> 00:10:23.420 may require a reduction in the rate of interest towards the vanishing point within the next 30 years. 116 00:10:23.420 --> 00:10:28.340 But under a system by which the rate of interest finds a uniform level after allowing for risk 117 00:10:28.340 --> 00:10:35.300 throughout the world under the operation of normal financial forces, this is most unlikely to occur. 118 00:10:35.300 --> 00:10:39.020 He then goes on to say that he does support national self-sufficiency 119 00:10:39.020 --> 00:10:44.860 if it could break up the world capital markets and allow England alone to push the rate of interest down towards zero 120 00:10:44.860 --> 00:10:47.380 and allow her first to enter the millennium. 121 00:10:47.380 --> 00:10:51.900 So, in the 1930s, he was nationalistic in this sense. 122 00:10:51.900 --> 00:10:56.580 But later on, when he saw an opening for pushing the world rate of interest down towards zero, 123 00:10:56.580 --> 00:11:00.620 after World War II, he became an internationalist. 124 00:11:00.620 --> 00:11:04.900 Finally, Keynes hated economic calculation. 125 00:11:04.900 --> 00:11:19.900 As Ludwig von Mises pointed out, the intellectual foundation of society, society which is based on scarcity, is economic calculation, which is encompassed in financial accountancy. 126 00:11:19.900 --> 00:11:32.100 Well, because Keynes detested this light of the society of scarcity and because it informed people, that is financial accounting, informed people of the opportunity costs of their present enjoyment 127 00:11:32.100 --> 00:11:39.540 and also of the course of plans that Keynes wanted the government to undertake by borrowing from the private sector. 128 00:11:39.540 --> 00:11:43.300 He attacked, viciously attacked, accounting. 129 00:11:45.300 --> 00:11:50.740 So, in this sense, he is a very insightful praxeologist. 130 00:11:50.740 --> 00:11:54.820 He realizes that really the basis of society is economic calculation. 131 00:11:55.300 --> 00:11:58.580 He says, the 19th century carried two extravagant lengths, 132 00:11:58.580 --> 00:12:02.980 The Criterion of What One Can Call, for short, the Financial Results 133 00:12:02.980 --> 00:12:05.460 as a test of the advisability of any course of action 134 00:12:05.460 --> 00:12:08.420 sponsored by private or by collective action. 135 00:12:08.420 --> 00:12:12.860 The whole conduct of life under the 19th century liberal capitalist regime 136 00:12:12.860 --> 00:12:16.380 was made into a sort of parody of an accountant's nightmare. 137 00:12:16.380 --> 00:12:20.740 Instead of using their vastly increased material and technical resources 138 00:12:20.740 --> 00:12:24.620 to build a wonder city, the men of the 19th century built slums. 139 00:12:25.940 --> 00:12:27.900 He continues. 140 00:12:27.900 --> 00:12:31.180 For the minds of this generation, now he's talking about his own generation, 141 00:12:31.180 --> 00:12:38.140 are still be clouded by bogus calculations, that they distrust conclusions which should be obvious, 142 00:12:38.140 --> 00:12:44.420 out of a reliance on a system of financial accounting, which casts doubt on whether such an operation will pay, 143 00:12:44.420 --> 00:12:46.660 building a wonder city, for example. 144 00:12:46.660 --> 00:12:49.900 We have to remain poor because it does not pay for us to be rich. 145 00:12:49.900 --> 00:12:54.420 We have to live in hovels, not because we cannot build palaces, but because we cannot afford them. 146 00:12:54.420 --> 00:12:59.260 The same rule of self-destructive financial calculation governs every walk of life. 147 00:12:59.260 --> 00:13:00.420 He then concludes, 148 00:13:00.420 --> 00:13:04.060 But once we allow ourselves to be disobedient to the test of an accountant's profit, 149 00:13:04.060 --> 00:13:07.500 we have begun to change our civilization. 150 00:13:07.500 --> 00:13:11.580 And this he wanted, he applauded, and he looked forward to. 151 00:13:11.580 --> 00:13:15.260 Okay, as a result of this view, 152 00:13:15.260 --> 00:13:20.260 Keynes advocated that the state become the agent of transformation of society, 153 00:13:20.260 --> 00:13:25.100 because it's only the state that, number one, could manipulate the interest rate 154 00:13:25.100 --> 00:13:30.420 and, number two, could ignore the profit and loss test of financial accounting. 155 00:13:33.380 --> 00:13:40.340 Unfortunately, there was a barrier to these desiderata, to these desired results, 156 00:13:40.340 --> 00:13:42.740 and that was the gold standard. 157 00:13:42.740 --> 00:13:46.860 First of all, the gold standard prevented tinkering with the interest rate, 158 00:13:46.860 --> 00:13:48.420 particularly because under the gold standard, 159 00:13:48.420 --> 00:13:53.920 If the government attempted to push down the interest rate by inflating the money supply, gold would flow out. 160 00:13:53.920 --> 00:13:58.420 We'd have international capital flows, which Keynes came to hate for that reason. 161 00:13:58.420 --> 00:14:05.420 And secondly, the gold standard also prevented tremendous state borrowing, 162 00:14:05.420 --> 00:14:10.420 expansive state borrowing for a project such as building his Wonder City. 163 00:14:10.420 --> 00:14:15.420 So Keynes' hatred of gold, his chrysophobia, is ultimately to be attributed to 164 00:14:15.420 --> 00:14:18.420 his desire for this quick solution to the economic problem. 165 00:14:18.420 --> 00:14:20.420 Interestingly, after I'd written this, 166 00:14:20.420 --> 00:14:24.420 I found that Wilhelm Repke, as I mentioned, 167 00:14:24.420 --> 00:14:27.420 a pro-gold standard anti-Keynesian economist, 168 00:14:27.420 --> 00:14:33.420 saw the connection between Keynes's Chrysophobia and his millenarianism, or millennialism. 169 00:14:33.420 --> 00:14:37.420 A short quote from him I want to read. 170 00:14:37.420 --> 00:14:40.420 Repke says, it can be traced from, that is, Chrysophobia, 171 00:14:40.420 --> 00:14:44.420 can be traced from John Law, where all arguments can already be found to Keynes. 172 00:14:44.420 --> 00:14:51.420 Chrysophobia does, in effect, have a penetrating odor of ideology and of a sort of world-do-goodery. 173 00:14:51.420 --> 00:14:58.420 It is a form of indignation about something allegedly antiquated, primitive, anti-progressive, reactionary, profit-minded. 174 00:14:58.420 --> 00:15:06.420 Chrysophobia is a form of social rationalism extolling something as progressive, enlightened and superior. 175 00:15:06.420 --> 00:15:11.420 It's a sort of doctrinairism in the sense of an attitude riding Rothschild over the facts. 176 00:15:11.420 --> 00:15:16.420 And, of course, the fact was the enduring scarcity that pervades human life. 177 00:15:21.420 --> 00:15:25.420 Okay, as any great messiah or would-be messiah, Keynes was a great myth-maker, 178 00:15:25.420 --> 00:15:33.420 and he wove an enormous number of myths designed to discredit the gold standard from the beginning of his professional life. 179 00:15:35.420 --> 00:15:39.420 In fact, not only did he attempt to discredit the gold standard, on one occasion he even defamed it. 180 00:15:39.420 --> 00:15:50.420 He turned into a person. He referred to it as Ori Sacra Famis in Latin, which as a plan of words could mean the sacred reputation of gold or the accursed reputation of gold. 181 00:15:50.420 --> 00:15:54.420 He went on and wrote a satirical attack on it. 182 00:15:54.420 --> 00:16:04.420 So Keynes then opposed gold, socially determined interest rates and investment allocations throughout the world during all the periods of his professional life. 183 00:16:04.420 --> 00:16:10.420 What are some of the myths that he perpetrated? And that are still existing today. 184 00:16:10.420 --> 00:16:16.420 First of all, in 1913, in his supposedly only pro-gold book, Indian Currency and Finance, 185 00:16:16.420 --> 00:16:23.420 he told us that the gold coin standard only works for Great Britain because it is the world's banker. 186 00:16:23.420 --> 00:16:25.420 It didn't really work for other nations. 187 00:16:25.420 --> 00:16:30.420 He advocated the other nations to develop a gold exchange standard. 188 00:16:30.420 --> 00:16:33.420 and the gold exchange standard. 189 00:16:33.420 --> 00:16:38.900 He went on and said that he revived a myth that David Ricardo had brought into economics 190 00:16:38.900 --> 00:16:44.260 by telling us that the circulation of gold among the public was really, and also the 191 00:16:44.260 --> 00:16:49.580 holding of large gold reserves by central banks, was an insupportable and intolerable 192 00:16:49.580 --> 00:16:50.580 expense. 193 00:16:50.580 --> 00:16:52.980 He wanted to get rid of them. 194 00:16:52.980 --> 00:16:58.500 Now Keynes, in this book, looked forward to the ideal currency system of the future as 195 00:16:58.500 --> 00:17:07.500 has a gold exchange standard and he even hinted that out of the gold exchange standard we get a paper money standard for the whole world. 196 00:17:07.500 --> 00:17:15.500 But it's interesting that he thought that the gold exchange standard was such an ideal system because twice in the history of the world it broke down with terrible results. 197 00:17:15.500 --> 00:17:24.500 Once in 1931 or so and again in 1971 under the guise of the Bretton Woods system. 198 00:17:24.500 --> 00:17:33.500 In 1923, he wrote a book which one economist, Michael Halpern, calls a time bomb underneath the gold standard. 199 00:17:33.500 --> 00:17:36.500 This book was called The Track on Monetary Reform. 200 00:17:36.500 --> 00:17:42.500 And here, Keynes, for the first time, made the claim, which eventually was accepted by almost all economists, 201 00:17:42.500 --> 00:17:48.500 though there's some reaction to it today, that there's a dilemma between internal and external stability. 202 00:17:48.500 --> 00:17:57.500 That is, if you're on a gold standard, your exchange rates are stable but at the cost of severe instability of your domestic price system. 203 00:17:57.500 --> 00:18:05.500 He also claimed that stable exchange rates and the gold standard are not a way of integrating the whole world economy, 204 00:18:05.500 --> 00:18:12.500 but he claimed it's merely convenience which adds to the efficiency and prosperity of foreign traders. 205 00:18:12.500 --> 00:18:22.140 He also told us that he acknowledged that there was tremendous long-run stability under the gold standard in the 19th century, that is, price stability. 206 00:18:22.140 --> 00:18:26.100 But he claimed that that was merely a half accidental circumstance. 207 00:18:26.100 --> 00:18:38.600 He also went on to say that it was partially a result of the fact that central banks inflated the money supply to offset falling prices or a price level that would have fallen 208 00:18:38.600 --> 00:18:42.080 because of a tremendous number of goods being produced 209 00:18:42.080 --> 00:18:44.880 or the increase in the growth of goods. 210 00:18:44.880 --> 00:18:49.080 In 1930, he was back on the attack again. 211 00:18:49.080 --> 00:18:53.000 Here, he began to focus on foreign investment as a villain 212 00:18:53.000 --> 00:18:56.480 under the gold standard. 213 00:18:56.480 --> 00:19:00.800 First of all, he claimed that, well, in the long run, 214 00:19:00.800 --> 00:19:06.760 we don't like foreign investment, we being the British rulers, 215 00:19:06.760 --> 00:19:11.920 because it used up British savings to increase capital goods, 216 00:19:11.920 --> 00:19:16.040 not to raise the productivity of British workers and get them to the millennium faster, 217 00:19:16.040 --> 00:19:19.320 but to raise productivity of workers throughout the world. 218 00:19:21.120 --> 00:19:25.400 Secondly, he believed that in the short run, we had a transfer problem. 219 00:19:25.400 --> 00:19:29.600 Basically, if we tried to transfer capital, 220 00:19:29.600 --> 00:19:32.920 Britain lent to the United States or lent to an underdeveloped country 221 00:19:32.920 --> 00:19:36.720 and tried to transfer capital, the capital via the gold standard, 222 00:19:36.720 --> 00:19:44.680 The central bank would have to raise interest rates and that would cause higher employment, falling prices and lower current income for the British working class. 223 00:19:44.680 --> 00:19:48.040 And finally, he made two statements that he really didn't try to back up. 224 00:19:48.040 --> 00:19:53.000 He said that gold has been in chronically short supply for all of history. 225 00:19:53.000 --> 00:20:03.080 And in some ways he implied that silver was to be much preferred, but that somehow gold, and this is the second part of this assertion, 226 00:20:03.080 --> 00:20:07.360 Gold due to irrational and deeply held psychological predilections, 227 00:20:07.360 --> 00:20:12.800 he called it a furtive Freudian cloak, overcame silver. 228 00:20:12.800 --> 00:20:21.680 Okay, so he didn't try to explain the emergence of the gold standard by looking at the market processes involved. 229 00:20:21.680 --> 00:20:28.040 He just basically asserted that it was due to psychological reasons. 230 00:20:28.040 --> 00:20:32.200 Okay, so what, oh finally, in one of the last articles he wrote, 231 00:20:32.200 --> 00:20:37.240 or rather an article in the 1940s, about 1943, 232 00:20:37.240 --> 00:20:41.720 Keynes made a further attack on the gold standard, and this wasn't based on a myth. 233 00:20:41.720 --> 00:20:45.800 By that time, Keynes openly was saying that wage rates, what he called efficiency wages, 234 00:20:45.800 --> 00:20:52.040 which are labor costs, were going to continue to rise, okay, year in and year out, 235 00:20:52.040 --> 00:20:57.960 and that what was wrong with the gold standard was that the gold standard would not permit these 236 00:20:57.960 --> 00:21:01.960 This rise of labor costs without bringing on severe depression. 237 00:21:01.960 --> 00:21:07.960 So he was openly advocating inflation at this point in 1943. 238 00:21:07.960 --> 00:21:11.960 That is, he said labor costs tended to rise more quickly in Great Britain 239 00:21:11.960 --> 00:21:13.960 than they did elsewhere in the world. 240 00:21:13.960 --> 00:21:18.960 If Great Britain tried to stop this with the gold standard mechanism, 241 00:21:18.960 --> 00:21:21.960 it would cause an outflow of gold, a tightening of the money supply 242 00:21:21.960 --> 00:21:23.960 and tremendous unemployment. 243 00:21:23.960 --> 00:21:33.960 So, what he basically went on to say was that this was going to continue into the future, the rise of labor costs, and he wanted to get rid of the gold standard because it prevented this. 244 00:21:36.960 --> 00:21:45.960 Okay, as I mentioned, let me just mention some of the plans, the many plans that Keynes came up with for international monetary reform. 245 00:21:45.960 --> 00:21:59.960 As early as 1913, as I mentioned in the book on Indian currency, Keynes advocated discouraging the deliberate discouraging of the public holding gold and centralizing all the gold reserves, even in England. 246 00:21:59.960 --> 00:22:13.960 He wanted to substitute the gold exchange standard for a full gold standard and he also wanted the government to manipulate the gold points by only allowing limited convertibility of currency into gold. 247 00:22:13.960 --> 00:22:21.960 So, already in 1913, he's tinkering with the gold mechanism and pushing down interest rates. 248 00:22:21.960 --> 00:22:29.960 And it was in this book, as I mentioned, that he pointed out that the gold exchange standard would eventually give rise to the ideal currency standard of the future. 249 00:22:29.960 --> 00:22:48.960 In 1923 in his book The Track, he called for the central bank, the Bank of England, to abandon its pledge to redeem its liabilities in gold and to seek instead to stabilize prices by manipulating the interest rates, short-run interest rates. 250 00:22:48.960 --> 00:22:58.960 But he didn't want the exchange rate to fluctuate too freely, he wanted the government to regulate that by changing the buying and selling price of gold every Thursday. 251 00:22:58.960 --> 00:23:04.960 which is something that later on President Roosevelt resorted to. 252 00:23:04.960 --> 00:23:08.960 He also wanted to widen the gold points once again. 253 00:23:08.960 --> 00:23:13.960 And he also had a strange scheme to manipulate the gold price in forward markets 254 00:23:13.960 --> 00:23:20.960 so as to artificially raise British short-term interest rates to prevent the outflow of capital. 255 00:23:20.960 --> 00:23:30.960 In 1930, in his treatise, Keynes came out for a comprehensive monetary reform, 256 00:23:30.960 --> 00:23:35.960 which included making domestic currencies, or at least currencies held by residents, 257 00:23:35.960 --> 00:23:39.960 inconvertible into gold, taking all gold out of circulation, 258 00:23:39.960 --> 00:23:45.960 putting all the gold into the central bank and reducing bank reserves, 259 00:23:45.960 --> 00:23:55.360 And then setting up what he called a super-national bank, a central bank's bank, issuing SBMs, super-national bank money. 260 00:23:55.360 --> 00:24:03.860 So in 1930, allegedly when he was in the period of his economic nationalism, he was calling for central bank cooperation. 261 00:24:03.860 --> 00:24:10.160 He was calling for worldwide inflation via a paper, a worldwide paper fiat currency. 262 00:24:10.160 --> 00:24:20.240 So he wasn't international because he thought in 1930, with the Depression, governments of the world may now listen to a call for world inflation. 263 00:24:20.240 --> 00:24:25.600 So he abandoned the call for flexible exchange rates. 264 00:24:25.600 --> 00:24:33.320 In addition, Keynes called for taxing and controlling long-term foreign investment. 265 00:24:33.320 --> 00:24:39.320 He also wanted short-term lending and capital exports manipulated by, again, 266 00:24:39.320 --> 00:24:44.320 changing the price at which the, or rather, the gold points. 267 00:24:44.320 --> 00:24:51.320 By 1943, Hayes came out with a plan known as the International Credit Union 268 00:24:51.320 --> 00:24:57.320 in which he called for a central, worldwide central bank, which wouldn't create fiat money, 269 00:24:57.320 --> 00:25:02.600 but would create bank deposits that only central banks could hold. 270 00:25:02.600 --> 00:25:06.840 This is known as the Keynes Plan of Monetary Reform 271 00:25:06.840 --> 00:25:09.880 and as we'll see in a moment or two, 272 00:25:09.880 --> 00:25:16.120 a lot of elements of this plan are combined in the various plans 273 00:25:16.120 --> 00:25:21.160 by current-day Keynesians to reform the International Monetary System. 274 00:25:21.160 --> 00:25:23.400 This plan was very, very, very inflationary. 275 00:25:23.400 --> 00:25:29.240 It proposed to tax those countries, which are called the creditor countries, 276 00:25:29.240 --> 00:25:33.320 which had sound monetary policies, such as the United States after World War II, 277 00:25:33.320 --> 00:25:35.760 or at least relative to the European countries. 278 00:25:35.760 --> 00:25:43.280 He wanted to put a 1% tax on them if their balances, their bank balances in this international bank were building up. 279 00:25:43.280 --> 00:25:53.280 Where on the other hand, there wasn't much control at all on the deficit countries who were doing the inflating. 280 00:25:53.280 --> 00:26:03.280 Much of this plan, but not all of it, was encompassed in the International Monetary Fund, established at Bretton Woods. 281 00:26:03.280 --> 00:26:19.280 The plan is heavily Keynesian. What is interesting was that a number of economists who formerly favored the gold standard, and even at the time did, fell prey to Keynes' false monetary internationalism. 282 00:26:19.280 --> 00:26:23.280 For example, Michael Halperin, who was a pro-gold standard economist, 283 00:26:23.280 --> 00:26:29.280 agreed with Keynes that we couldn't go back to the gold standard after the World War II, 284 00:26:29.280 --> 00:26:33.280 because we would first have to develop internationalism. 285 00:26:33.280 --> 00:26:36.280 That is, we had to develop international cooperation among central banks. 286 00:26:36.280 --> 00:26:39.280 So he wanted to postpone going back to gold. 287 00:26:39.280 --> 00:26:44.280 Another economist, Edwin Kemmerer, who believed in the gold coin standard, 288 00:26:44.280 --> 00:26:48.280 said, well, before we could have the gold coin standard, we have to set up a world central bank. 289 00:26:48.280 --> 00:27:07.280 Bank. The only economist who courageously fought this was B.M. Anderson, who was a Wall Street economist for a long period of time, or bank economist, and he came up with a great statement in support of the gold standard and against this phony internationalism of Keynes. 290 00:27:07.280 --> 00:27:26.280 He said the following, he said, I want to see a real gold standard world again, with several powerful money centers competing for gold and holding one another in check. 291 00:27:26.280 --> 00:27:33.280 In other words, he didn't care, he wanted to see these flows of capital out of the countries with the inflationary monetary policies. 292 00:27:33.280 --> 00:27:37.280 I don't want international monetary cooperation in ordinary times. 293 00:27:37.280 --> 00:27:44.280 It prolongs unsound tendencies, as in 1924-29, and then it breaks down in crises as in 1931. 294 00:27:44.280 --> 00:27:50.280 I want competition in ordinary times and cooperation only in crises, and that at a stiff rate of interest. 295 00:27:50.280 --> 00:27:53.280 That is, if one central bank was to help another, they would charge him a penalty rate. 296 00:27:53.280 --> 00:27:58.280 I have been too close to the centers of wisdom and power in governments and central banks 297 00:27:58.280 --> 00:28:04.280 I don't have any belief at all in the adequacy of their wisdom to do more than routine things. 298 00:28:04.280 --> 00:28:09.280 The more I see of governmental economic policy, the more I trust the automatic forces of free markets. 299 00:28:09.280 --> 00:28:14.280 The more I see of public monetary policy, the more I trust gold. 300 00:28:14.280 --> 00:28:19.280 So he was one of the few that didn't succumb to Keynes' arguments on this. 301 00:28:19.280 --> 00:28:25.280 Finally, let me say a few words about current plans for monetary reform, 302 00:28:25.280 --> 00:28:30.880 which have been brought up or presented by Keynesian economists. 303 00:28:31.980 --> 00:28:36.780 Basically, Keynesian policies on the national level have been discredited since the early 1970s, 304 00:28:36.780 --> 00:28:38.380 including fiscal fine-tuning. 305 00:28:40.080 --> 00:28:45.180 However, because of the unpredictable and unpredicted volatility of floating exchange rates 306 00:28:45.180 --> 00:28:47.780 that we've had since 1973, 307 00:28:49.080 --> 00:28:53.980 many government economic policymakers have become dissatisfied with floating exchange rates. 308 00:28:53.980 --> 00:29:02.980 One of the reasons is that floating exchange rates pretty quickly shows up the effects of inflationary monetary policies and huge budget deficits. 309 00:29:02.980 --> 00:29:09.980 Now, as Murray Rothbard has pointed out, Keynesian economics has evolved into a pure economics of power, 310 00:29:09.980 --> 00:29:18.980 promising the powers that be really a quick fix or a papering over of the effects and consequences of inflation. 311 00:29:18.980 --> 00:29:21.980 And that's what these new plans all pretty much do. 312 00:29:21.980 --> 00:29:27.980 What they seek to do is to allow governments to reintroduce fiscal fine-tuning by the back door 313 00:29:27.980 --> 00:29:35.980 and allow them to also inflate while ensuring a seeming stability of exchange rates, at least temporarily. 314 00:29:35.980 --> 00:29:38.980 Let me just allude to a number of these plans. 315 00:29:38.980 --> 00:29:45.980 First of all, we have the crawling target zones, which is a variation on the old crawling peg. 316 00:29:45.980 --> 00:29:49.980 Two economists, both of whom were former bureaucrats, 317 00:29:49.980 --> 00:30:04.980 The bureaucrats, John Williamson was a former advisor to the IMF and to the British Treasury and C. Fred Bergsten, who was a former assistant secretary of the Treasury and member of the senior staff of the National Security Council, advocate this crawling target zones. 318 00:30:04.980 --> 00:30:18.980 Basically, what they want to do is to formalize the Louvre Accord of 1987 among the seven industrial democracies, including the US, and make the so-called secret reference ranges of exchange rates. 319 00:30:18.980 --> 00:30:23.540 Exchange Rates, they want to make them formal and binding. 320 00:30:23.540 --> 00:30:29.700 They claim that there's misalignments of exchange rates, that is, when exchange rates float, 321 00:30:29.700 --> 00:30:34.180 you have real problems in your export sector and your import sector. 322 00:30:34.180 --> 00:30:40.880 The reason being, and Mises pointed this out a long time ago, that exchange rates adjust 323 00:30:40.880 --> 00:30:45.980 much more quickly to expected changes in monetary policy, expected inflation, than do internal 324 00:30:45.980 --> 00:30:46.980 prices. 325 00:30:46.980 --> 00:30:51.300 So before, in the interim, before internal prices adjust, you have tremendous, 326 00:30:51.300 --> 00:30:54.900 tremendously devastating, in many cases, real effects. 327 00:30:54.900 --> 00:31:01.980 For example, the appreciation of the U.S. dollar from 1982 until 1985 or so, 328 00:31:01.980 --> 00:31:04.900 that caused the shrinkage of our export sector. 329 00:31:04.900 --> 00:31:06.820 Okay, so they want to get rid of these misalignments, 330 00:31:06.820 --> 00:31:12.100 but they don't want to do it by engaging in non-inflationary monetary policy. 331 00:31:12.100 --> 00:31:23.100 What they want to do is to find some exchange rate, plus or minus 10%, that they call the fundamental equilibrium exchange rate. 332 00:31:23.100 --> 00:31:32.100 Now what they want to do is the government to fix the real exchange rate and allow the nominal rate to change according to differential inflation. 333 00:31:32.100 --> 00:31:40.100 So the sole virtue of fixed exchange rate without gold is that it may very well restrain the inflationary propensities of governments, 334 00:31:40.100 --> 00:31:47.100 of Governments. But this doesn't even do that, because it allows the nominal exchange rate just to float. 335 00:31:47.100 --> 00:31:52.100 That is, if the U.S. inflates more than Great Britain, for example, the exchange rate depreciates. 336 00:31:52.100 --> 00:32:01.100 As long as the exchange rate doesn't depreciate faster than the rise in prices, they'll allow it to move. 337 00:32:01.100 --> 00:32:10.700 They want to use, they want the government to use manipulation of interest rates to keep the exchange rate within this target zone. 338 00:32:10.700 --> 00:32:25.700 But on the other hand, they want to allow the governments, the group of seven governments, to use fiscal fine-tuning to expand continuously year after year what they call domestic demand. 339 00:32:25.700 --> 00:32:29.200 In other words, they want to bring back the discredited fiscal fine-tuning. 340 00:32:29.200 --> 00:32:41.200 By immobilizing monetary policy, by aiming it towards exchange rates, the government is left with only one instrument with which to increase demand in the domestic economy. 341 00:32:41.200 --> 00:32:46.200 So we're back with fiscal fine-tuning. 342 00:32:46.200 --> 00:32:58.200 And finally, if people, they want each government, each of the seven governments to set some sort of target level of increase in their spending, of domestic spending. 343 00:32:58.200 --> 00:33:10.200 If total spending of these seven countries falls short of this target level, they then want all seven governments to agree to push down interest rates in unison. 344 00:33:10.200 --> 00:33:19.000 The second proposal is the gold standard without gold, put forward by Ronald McKinnon, a professor at Stanford University. 345 00:33:19.000 --> 00:33:23.800 He wants to stamp out the social inefficiency of floating exchange rates, okay, 346 00:33:23.800 --> 00:33:32.000 due to the fact that private foreign exchange traders do not have sufficient information regarding future monetary policy. 347 00:33:32.000 --> 00:33:37.800 Well, if monetary policy was non-inflationary, okay, they would have that information. 348 00:33:37.800 --> 00:33:41.800 So, in some sense, it's sort of placing the blame on the private sector. 349 00:33:43.800 --> 00:33:49.800 However, government planners using computed price indexes, past price indexes, 350 00:33:49.800 --> 00:33:53.800 and also using a very simplistic version of the purchasing power of parity theory of exchange rates, 351 00:33:53.800 --> 00:33:58.800 which in its more expanded form is correct. 352 00:33:59.800 --> 00:34:02.800 They believe government planners can come up with the right exchange rate. 353 00:34:02.800 --> 00:34:08.480 and some of the details of the plan include fixing that they would fix they 354 00:34:08.480 --> 00:34:12.040 would actually fix exchange rates nominal exchange rates among three currencies the 355 00:34:12.040 --> 00:34:19.440 yen the dollar and the more McKinnon encourages daily manipulation of the 356 00:34:19.440 --> 00:34:25.440 exchange rate to ensure that you have no destabilizing flows of short-term 357 00:34:25.440 --> 00:34:29.640 capital he also wants the government to intervene if that doesn't work to 358 00:34:29.640 --> 00:34:32.520 intervene directly in the foreign exchange market. 359 00:34:32.520 --> 00:34:34.640 Finally, he wants joint monetary policy. 360 00:34:34.640 --> 00:34:38.320 That is, he wants the three central banks to get together 361 00:34:38.320 --> 00:34:41.240 and expand their money supply in unison 362 00:34:41.240 --> 00:34:47.800 with the aim of keeping a wholesale price level stable. 363 00:34:47.800 --> 00:34:50.200 Thus, national central banks would give up their right 364 00:34:50.200 --> 00:34:53.080 to inflate at different rates, but not to inflate. 365 00:34:53.080 --> 00:34:53.840 Why not gold? 366 00:34:53.840 --> 00:34:57.320 Why does he want a gold standard without gold? 367 00:34:57.320 --> 00:35:13.320 Basically, he claims that the gold standard is an unstable base for the money supplies of the different nations and he, like Keynes, dismisses the 19th century experience with stable prices and integrated world price structure that came about under the gold standard. 368 00:35:13.320 --> 00:35:27.240 Again, he claims that, well, it was really paper money inflation that provided this stability, not the gold standard itself, that is, the central banks using discretion manipulated the money supply so as to offset any 10% 369 00:35:27.240 --> 00:35:31.240 Natural Tendency of Prices to Fall under Gold. 370 00:35:31.240 --> 00:35:37.240 Finally, the final plan is one for a global bank of issue. 371 00:35:37.240 --> 00:35:44.240 This is put forward by Richard Cooper, a member of the Council of Foreign Relations and a member of, 372 00:35:44.240 --> 00:35:48.240 I believe it was Kennedy's Council of Economic Advisers. 373 00:35:48.240 --> 00:35:54.240 Again, the goal is to reduce arbitrary movements in real exchange rates 374 00:35:54.240 --> 00:35:58.240 and to fix exchange rates by imposing a single currency. 375 00:35:58.240 --> 00:36:02.240 So this is more ambitious than the previous two plans. 376 00:36:02.240 --> 00:36:08.240 He would actually have some currency, it could be the dollar or derivative of the dollar, 377 00:36:08.240 --> 00:36:11.240 but it would be a single currency. 378 00:36:11.240 --> 00:36:15.240 And the global bank would engage in open market operations, 379 00:36:15.240 --> 00:36:19.240 buying the securities of the various member governments. 380 00:36:19.240 --> 00:36:25.240 So governments would give up their control over monetary policy, 381 00:36:25.240 --> 00:36:28.240 over the rates at which they were inflating their money supply. 382 00:36:28.240 --> 00:36:35.240 However, they would be able to use fiscal policy, that is budget deficits, to get their economies moving. 383 00:36:35.240 --> 00:36:41.240 But they could only monetize these debts to the extent that the new money was being used, 384 00:36:41.240 --> 00:36:47.240 the increment in the new amount of world money was being used to purchase their own securities. 385 00:36:47.240 --> 00:36:59.240 And finally, a fourth Keynesian, James Tobin, who agrees with these plans, but says that they're really not viable in the foreseeable future. 386 00:36:59.240 --> 00:37:07.240 He instead regretfully recommends, and I'm quoting, throwing some sand in the wheels of our excessively efficient international money markets. 387 00:37:07.240 --> 00:37:22.240 What he wants to do is to put a 1% tax, internationally uniform, all countries, each country would be in charge of enforcing a tax within its own borders, on all spot conversions of one currency into another. 388 00:37:22.240 --> 00:37:36.240 This would fall most heavily on short-term capital movements. For example, he estimates that a 1% tax would require for it to be profitable to invest in a foreign treasury bill. 389 00:37:36.240 --> 00:37:40.840 There would have to be an eight percentage point differential in the annual rate of interest. 390 00:37:40.840 --> 00:37:47.240 So what he's done is to segment the world capital markets, which was Keynes's point, 391 00:37:47.240 --> 00:37:52.240 to prevent capital outflows as a reaction to inflationary government monetary policy. 392 00:37:55.240 --> 00:38:04.240 Okay, to sum up, while these plans do not partake of Keynes's millennialism, 393 00:38:04.240 --> 00:38:11.740 Okay, they do go back to the monetary plans that he devised in support of this. 394 00:38:11.740 --> 00:38:20.740 In fact, in today's world, the goal of economic growth really does hark back to this whole idea of moving us into the millennium. 395 00:38:20.740 --> 00:38:25.740 That is, that that's one of the legitimate goals of government economic policy, to spur economic growth. 396 00:38:25.740 --> 00:38:30.740 I mean, it's a pale reflection of Keynes's millennialism, but it's there. 397 00:38:30.740 --> 00:38:32.740 Oh, I'll stop here.