International Monetary Systems | Joseph T. Salerno

okay today I'm I'm gonna I'm going to talk about international monetary systems and how since 1914 with the breakdown or actually the destruction by governments of the classical gold standard the international monetary system has lurched from one crisis to another and we've pretty much had monetary chaos reaching to the present day so let me start with an unconventional typology of monetary systems for those of you who've taken International Economics but in particular international monetary economics on what you're usually told by your professors is that there's two types of monetary systems or two categories one is flexible exchange rates where exchange rates fluctuate against one another and the other is fixed exchange rates so what they do is they would generally include the classical gold standard under the category of fixed exchange rates now that would mean that that would be in the same category as when I consider the worst system a Fiat reserves created by a world central bank that is a one-world money so in order to disentangle this we have to have a different criterion for separating monetary systems for distinguishing them so what I've come up with is the following either money is a market supplied money based on a commodity and that was true and that was instantiated in history via the 100% gold standard and all money originated as a commodity so all money originated as some sort of 100 percent commodity standard gold silver bronze leather and so on I think Philip agus spoke about the different types of of money's the second is the classical gold standard which which did have some government interference but the money was still basically markets supplied there's an absolute break on the right side the government monopolized fiat money okay and that could be of the form of fluctuating exchange rates freely floating rates which we had for a very short time where the government doesn't interfere the US government did not interfere with the the value of the dollar on foreign exchange markets but then when the fortunes of the monetarists in the Reagan administration sort of declined what happened was that we quickly went at what's called dirty floating again which is where the government tries to manage the value of exchange rates interferes in the foreign exchange markets there's also a fixed exchange rate look again both are based on fiat money government operates fiat money you have a central bank cooperation with central bank's get together and try to stabilize exchange rates you have the pseudo gold standard of 1925 to 1931 so-called Gold Exchange standard and then which was brought back under different guys from 1946 to 1971 as a Bretton Woods system and finally you have these Keynesian plans for a sort of a one-world money if you buy a world central bank so I will storm the classical gold standard and move over to talking about the Bretton Woods standard which was its successor and then talk a little bit about the fluctuating exchange rates one thing to keep in mind is that the gold standard did not break down in 1914 or the Gold Exchange standard 1931 as Mises always emphasizes it was destroyed by deliberate government policy also another fallacy that I want to address and that is that in some sense to have a gold standard governments have to follow the rules of the game as more as Mises points out the gold standard is not a game it's a serious social institution which binds government and their ability to create money it constrains them so let me just jump right away to the performance of the classical gold standard which could involve us will see a central bank or not in the US it didn't involve a central bank in Great Britain into other countries it did involve a central bank so let's take the US if you take the first bullet point 80 cents in the year 1914 had the same purchasing powers a dollar in the year 1800 so in other words prices declined gently over time by a cumulative amount of 20% we actually had a gentle secular deflation over that period of time jumped out to the third bullet point we had an enormous economic growth after the Civil War when the u.s. became an industrial power in fact from 1880 to 1896 we had the greatest period the greatest rate of growth in US history what happened during that period okay we had deflation that is prices falling prices fell by about 18 percent that is you could buy with 82 cents in 1896 what would have cost you more in 1880 full dollar that did not in the least hinder the tremendous prosperity a growth in prosperity that that occurred during that period and then from that low point of prices we the gold was discovered and there were discoveries and and technological innovations in the production of gold so that we had what was called at the time a great the great inflation and the great inflation was basically 19 percent over 19 years that is the dollar depreciated in value by about 19 percent so of course we're at the dollar 19 to buy in 1914 what you could have bought for a dollar in 1896 that's about one 1% per year okay and because of the experience with with the gold standard where prices generally gently declined this was considered to be unprecedented this was considered to be a great inflation of course by today's standards it was clearly not in fact the way of macro economists today defined deflation this was deflation because you have to have about a 2% cushion to make sure you're not having a deflation that is you have to have an inflation rate of about 2% okay otherwise otherwise a deflation is imminent okay and then when governments got involved with money in the u.s. it was the Federal Reserve System which came into operation in 1914 in 1914 what you could have worked for a dollar could now cost you twenty one dollars and forty cents that is in 2007 I have updated figures but I forgot to put them in but in any case so prices increased by more than 21 times during the period that the Fed was in charge of stabilizing or our money and our economy okay and then just from 1971 and that's the year the final link with gold was broken when President Nick Nixon ignominiously closed the gold window meaning he refused to convert any more foreign dollars from foreign governments and foreign central banks into gold which was a solemn promise made to the to the to the these governments at the Bretton Woods meetings in 1944 that set up this sort of a phony gold standard so since that time prices have increased by five times so prices were 5 times higher in 2007 they were in 1971 and then supposedly sometime in 1980s central banks finally learned how to address inflation and how did how to maintain a non inflationary economy okay so they thought they did a good job it was called the Great Moderation but notice that prices increased by about two and a half times okay I think they they think that the Great Moderation ended sometime in 2005 or 2006 so they did a terrible job in trying to manage money so let's let's look and see why the gold standard what's so successful in preventing inflation allowing prices to fall as the amount of goods and services in the economy increased so what was a gold standard fundamentally the classical gold standard meant that the dollar was simply a name for a specific weight of gold that is the dollar was legally defined as approximately one twentieth of an ounce of gold and you can see that here us officially went on a gold standard in 1834 it lasted for about a hundred years it was in 1933 that Roosevelt stole the goal from the people that he called it back in legally mandated that it that be returned so it was legally defined as twenty three point twenty two grains of gold which works out to about 25 of an ounce of gold okay Great Britain went on on to the go back on the gold standard if there's a Napoleonic Wars in 1821 and they went off the gold in 1931 so about a hundred ten years one pound during that period was defined as 113 grains of gold okay which was equal to about a quarter of an ounce of gold now it was often said that with the four dollars and 86 I mean the exchange rate was a four dollars eighty six cents would buy you one British pound as it was called a fixed exchange rate system but it wasn't a fixed exchange rate system in fact the reason why it costs approximately five dollars to get one pound was because a pound was defined as a weight of five times the amount of gold as a dollar was so it's like saying that there's a fixed exchange rate between a nickel and a quarter five nickels buys one quarter no no it's just arithmetic because a Nicholas defines one twentieth of a dollar the quarters defines 1/4 of a dollar okay so there were no exchange rates under the gold standard we were all on the same standard different countries had different monetary units okay that were defined in different weights of gold now a few things about the classical golf standard it may or may not involve as I mentioned before central bank it did in Great Britain it did not in the u.s. there was gold coin in circulation alongside notes and deposits but the notes and deposits were not money okay and they were understood by the holders of those notes in deposits not to be money in fact when the government wanted to issue any sort of currency it had to always specify that is going to pay beet lean gold this is a $50 gold certificate the United States of America $50 in gold coin payable to the bearer on demand this is not money there's just a ticket to pick money up when you wanted it to pick up the gold when you wanted it it was more convenient to use this since in some cases in exchange then to go and actually take the physical gold okay so just as you as the title to your car that I might may sell to or my car that might sell to her is not that the good itself it's just the right for her to pick up the car at my house at any time the same was true of gold okay gold was money nelson deposits were simply certificates that certifying that you had the right the legal claim on a specific amount of gold and here's an something interesting it was actually a hundred thousand dollar gold certificate that i found but it was only used between banks to clear the clear banking balances between banks and i've written elsewhere how the government has reduced the denominations of our notes okay so to today it's 100 dollars which is worth I forget what what the figure was but let's say hundred dollars was worth about twenty dollars in 1970 approximately okay so that means that the real in real terms of real purchasing power will the highest bill we have is is is you know something that could have bought $20 worth of goods in 1970 why why is that this is a little off the point but the reason is that the government doesn't what the government wants to discourage transactions in cash because they can't track them so this is true in all countries all countries have been reducing the highest denomination of of their their monies okay there was a ten thousand dollar bill in circulation there was a five thousand dollar bill in circulation until they were I think legally banned in 1964 the Fed actually stopped producing them in the 1940s but there were a five hundred dollar bill and so on thousand dollar bill so it isn't accidental that that that we don't see them around anymore that they're not being minted it's just another expression of our police state here in the US okay the second thing I want to mention is that what constrains governments from not increasing the money supply and causing inflation under the gold standard was something that has a fancy name it was called the a price specie flow mechanism it was really a balance of payments process and let me explain how it worked first ones free with diagram here's a gold standard the classical gold standard where a central bank would hold all the gold or much of it so there's two billion dollars worth of gold now at the central bank when it uses its own notes has a 40 percent reserve ratio by law which the Federal Reserve had a 40 percent reserve ratio into the 1960s they would have to hold to billions they could only create five billion dollars we're not looking at the red figures yet okay so they create five billion dollars but since the central bank notes and the notes that that we use for cash are also used by the banking system as their reserves so when you deposit cash that's credit to their reserves and let's assume that the reserve ratio is 20 percent okay that that when they had five billion dollars in reserves that he sent these these notes they could create twenty five billion dollars of checking deposit money okay so let's say that's that that's the current situation now let's say the the the central bank wants increase the money supply for whatever reason so what it does then is it increases its central bank notes by a billion dollars to six billion okay and it somehow gets the law changed so the reserve ratio is now one-third 33 33 point three percent of all central bank notes have to be backed by gold okay now that means that there's another 1 billion dollars of cash in circulation when it's deposited in banks banks have a billion of more of reserves remember they have a 20 percent reserve requirement they have to backup their deposits by either gold or or central bank notes which are claims to gold okay so we get a 20 percent increase in the money supply and we get a 20 percent in proximity in prices so prices shoot up in the US okay well look they inflate it I mean how did the classical gold stairs stop them from inflating well that wasn't that's not the end of the story it's just the beginning of the story prices in the US then shoot up above foreign prices as this money gets it this new money gets into circulation so the money supplying us goes up but prices in the u.s. pee for prices go up above world prices suddenly the US is the worse is a better market to sell to and a worse market to buy from right if our prices are higher than world prices so our exports go down x4 exports or imports shoot up we suddenly get a balance of payments deficit okay our bounce claims is less than zero money we've purchased more from abroad than they they're purchasing from us now what does that mean well foreigners don't want our paper dollars and the gold standard they wanted gold they would present the dollars for gold when that in the u.s. gold stock was thought to drop that two billion dollars would start to shrink the central bank would be now below have a reserve ratio below it's legally mandated ratio or if it wasn't legally mandated below the ratio of they were comfortable holding okay so that what would they do they would have to reduce the money supply that is they would have to begin to contract the central bank notes which means its reserves is the bank readable reduced and the banks then had to call it some of their loans and liquidate some of their the checking deposits so the money supply would fall back towards its old level balance of payments would then because now that's as prices fell exports would pick up imports would fall okay we wouldn't buy as much from foreign countries with our prices now are relatively low and gold would flow back in so they could not continually inflate the money supply okay every time they did there was this mechanism called price specie flow mechanism specie is a name for the precious metals gold and silver so prices would change and gold or silver would flow out of the country because that's the way you settled with foreigners when when you had a deficit with them okay they want they didn't want your dollars they hopefully wanted the gold or the silver the money okay so the upshot of all this is that on the growth of the money supply was strictly regulated by gold mining basically throughout the world and so that on banknotes and deposits increasing in quantity only to the extent that that that gold reserves increased because remember with 30 all those thirty billion dollars for twenty five billion dollars in checking deposits is ultimately under the goal state a claim on the central banks two billion dollars worth of gold so they're very fearful that if people lost confidence that they could redeem their their dollars their paper notes and their deposits for gold then they would rush to the banks and the banks would they could demand gold from the banks and then the banks have to use their reserves their fellow in Federal Reserve notes and then goat got going it's a Federal Reserve and asked for the gold but of course there's not enough gold if everyone loses confidence so that's why they're very very careful not to over expand now this gold standard and this more marvelous mechanism for keeping governments in check was destroyed in 1914 by the variable belligerents within two weeks of World War one the two weeks of the beginning of World War one every government had gone off the gold standard the US didn't did not enter until 1917 but in 1971 it entered it put an embargo on the export of gold and the import of gold in other words you had to go to the Treasury and get permission if you wanted to send gold abroad so and effectively what we want we went off the gold standard - even though it was sort of nominal okay the war ended we went back to as well we're gonna talk more about the Bretton Woods system it was similar when we the US went back to the gold standard but the rest of the world really didn't it took them a while by 1925 they began returning to the gold standard but it was a it was already a watered down version of the gold standard basically just the British Pound and the US dollar were convertible into gold but all the other countries all the other European countries pretty much held dollars in gold as their reserves okay which we're again claims on gold the US and Great Britain so that was called the Gold Exchange standard also Great Britain went back to a gold Bill Boyd standard meaning that it would only it would only convert pounds British pounds into gold in the form big bars so the circulation of gold coins dried up and there was a war against gold coins in the US where you were considered to be old-fashioned where the government's the US government tried to once a lot propaganda campaign to get people to use notes and checking deposits and so on okay then in 1931 Great Britain run off the gold standard the because of the depression the u.s. went off the gold standard in 1933 and then France Switzerland a number of other European countries in the so-called with the cold the Latin Union they weren't off the gold in 1936 so the gold standard was dead what happened was basically then everyone tried to devalue their currencies this was the depression you wanted to sell more to your neighbors you want to increase your exports just like the marketless counseled you wanted to increase your exports so that they'll bring money in and and and expand your industry and increase the employment okay that was called the beggar-thy-neighbor policies but everybody did that everybody tried to make their currencies cheaper how did they make their currencies cheaper well the way the US did it was by devaluing so what they did was they printed off an up enough paper okay to push the price of gold from 35 from $20 an ounce to $35 an ounce so the price of gold rose but when I went out and bought this gold what happened was that that new money used the money to do that that end when he got into circulation and push prices up okay needless to say that policy of devaluation that policy of trying to keep your neighbors imports out and to sell your exports cause the downward spiral of international trade and investment it almost completely stopped in the 1930s okay closing all countries to become even even poorer okay the Allies when they realize they were gonna win the war Germany started to talk about a new monetary system and everybody agreed that gold had to play some role because of the tremendous monetary chaos that existed in 1930s and you know during World War two so they all met at a huge hotel resort in in Bretton Woods New Hampshire and I was 1944 john maynard keynes represented the british treasury and these were the two big players written in the US and Harry Dexter white represented the US Treasury Harry Dexter white was later found him to be a commie spy but for what it's worth and they both had these grandiose plans the Cain's wanted something called Bank which is Bank Gold okay ooo war for gold if he wanted some kind of a world currency to back up the national currencies that could be so so if somebody had a deficit they didn't have to contract their money supply right as you would have under the old glass of gold standard you could run deficits but this world organization would print up the bank and you could pay your debts with a bank or okay and the same thing Harry Dexter white had a suitably commie name for his his proposed unit it was called the Union UNITA uniting the whole world so but there was a lot of hashing out what was going to be the system and the system that emerged was really not Keynes's system though it had elements of it wasn't the US Treasurys initial proposal though it had elements of that it basically was the the gold standard that the fake gold standard that was imposed or that was implemented from 1925 1931 it was called the Bretton Woods system and he let me just give you the description of the system first there would be one key currency only one currency would be convertible into gold okay and guess which country currency that was who was the overwhelming victor in World War two the United States so it would be the US dollar uh and it it would it would be redeemable in gold at the rate of $35 an ounce which was a devalued on price of gold okay but that's okay because it was a lot of new money that was created so it was reasonable to go back to a gold standard at a higher price and to admit that there was inflation and that paper money now was worth less than it was before that was reasonable what was not reasonable is that the currency of all other nations were not directly convertible into gold but we're had fixed exchange rates in terms of the dollar so there's a dollar price of all the other currencies to pound the franc the deutsche mark and so on and even crazier the US dollar was only convertible into gold for foreign central banks and government institutions okay US citizens not only could they not convert their dollars into gold but they could not even own gold they were forbidden to own gold unless they were they had licenses as dentists or jewelers and then they could purchase gold because they needed in their trade okay you couldn't even own gold in a foreign country an American who who had a gold store somewhere in Canada or you know in a bank or whatever in Canada was in violation of the law that that law was finally repealed in 1976 okay so the non-key currencies which is all the other currencies but the dollar were backed by dollars not by gold okay so all the money in the world was now a claim to the extent that there was fixed exchange rates with the dollar was now a claim on the u.s. gold stock but that wasn't so bad to begin with because the US had most of the gold in the world because the belligerents had the US was the industrial power that really provided the arms for Great Britain and and and the USSR and so on so a lot of gold accumulated in the US and here it's a picture of the Bretton Woods system so I should have put this is a u.s. gold stock and I think the reserve requirement was that there had to be 40 percent backing of Federal Reserve notes and deposits by gold and then there was a commercial bank the pot that was lowered over time okay then the commercial bank deposits in the US okay the checking accounts were backed by the Federal Reserve notes and deposits and then the foreign currency commercial bank deposits okay foreign foreign bank deposits they didn't weren't backed by gold they were they held both government securities but also checking accounts here in the US so in effect everyone in the system had a claim on the US dollar goal which as I said wasn't such a bad thing in the beginning because in 1950 we had 25 billion dollars worth of gold in order to suck foreign liabilities that is the the dollar liabilities that foreign governments and so on had were about half of that so there's like 200 percent reserves because US money was not backed by gold in the sense that US citizens could not didn't have a claim on that gold stock only foreign governments did okay so they were very very confident that the dollar was as good as gold so they were willing when we ran balance of payments deficits that means they were willing to accept the gold I'm sorry accept our dollars and then using our dollars print more of their money so the US and that ways we'll see generated a worldwide inflation okay the system really didn't kick in until 1958 when we had full convertibility okay so it took a while for it to actually begin operating fully even though it was put in place in 1946 but notice this sets up perverse incentives for the US right think about it does does the balance of payments deficit have any adverse effect on the US government no the reason is that if other countries are willing to accept the dollars then if you want a balance of payments deficit that means you can import a lot of goods from other people give them your paper and they'll accept your paper and not try to buy any goods back so you're taking their real goods which is keeping it so you get more goods it's keeping the inflation right down in your country and you're exploiting the inflation so we're exporting inflation in exchange for real goods this is how the u.s. paid for the simultaneous war on poverty and Vietnam War the Europeans but President Johnson at the time said we can have both guns and butter okay sexist accent so guns meaning defense will you know fight the war butter meaning consumer so consumer goods didn't have to tighten their belt in the 1960s fact we were quite well-off the 1960s why because Europeans were providing us with their goods and getting our money the goal the French economist Jacques Rueff who was a friend of Cheryl de Gaulle a close adviser to show the goal who was the French president at the time started saying that you know what this has got to break down because the u.s. is just going to cause a huge inflation and especially if we don't demand our gold back so what began to happen was our gold stock began to fall okay as some nations would demand goal for their dollars but also there was a free gold market people could buy gold in Europe in Zurich and in London so whenever people wanted to buy gold that would push the price of gold up above $35 so what would the US have to do but the Bank of England would would then turn in some of the pounds because they wanted to you had to keep the price of gold at $35 an ounce and they would begin to sell the gold on those markets so that was a drain on the US gold stock okay when the war on poverty in the Vietnam War got into full swing these dollars kept accumulating our gold stock kept shrinking so that by 1967 68 we had gold stock of 12 billion then down to 10 billion and now we had demands in that gold stock of about six times the amount that we had it was at this point during his time shelled the ball under the advice of Jacques Rueff I'm demanded our gold back the gold back and Germany also demanded gold that they their dollar holdings be converting to gold of course we weren't able to do that well Germany was still an occupied country in effect with those US troops all over Germany so we basically blackmailed them we threatened to remove our nuclear shield you know if they persisted in this you know in getting trying to get their property back so they backed off the u.s. the French god-blessed some sent warships to pick up their gold they didn't not the lender they pulled out of NATO temporarily the threat of us removing our nuclear shield against the USSR was hollow because they had their own nuclear force and they built it up more and so they said these warships to make sure the gold would be secured because you know you can't trust the Americans they might if they sent commercial ships they might have an accident at sea so that was your thinking and till they got the gold in 1968 the run on gold was so great in these a market and let me tell you why it was a run on coal by then the dollar was way overvalued meaning prices began now to rise in the u.s. too so very very high if you could somehow get gold for 35 if you could somehow sell gold get $35 I'm sorry sell sell we'd take your $35 get gold from from the through official means and then take the gold and and sell on these these free markets you could you could wind up getting $48 for the for the gold and then what you could do is you've made the five dollar or dollar profit okay you went in with 35 you bought the gold you sold gold for 40 because the price was shooting up on these other markets and so the US didn't want to continually push the price back down and keep that $35 so what it did then was to establish a two-tier system meaning that from that point onward only governments and central banks would sell gold to one another $35 an ounce they wouldn't even intervene in the private markets that didn't matter what would happen okay they're just going to ignore it but that was not a satisfactory solution so some people say that the Bretton Woods system broke down then but it still still formally in place that contract to convert gold into dollars for foreign banks the foreign central banks and government institutions okay on demand by 1971 there was a huge run on I mean the price the gold price was really shooting up so the US government was again pouring gold in okay trying to keep the price down and we were losing gold well with down nine billion but we were losing at such a rate that we would the whole nine billion dollars in two or three weeks at that point President Nixon closed the closed the gold window he went on national television in August 71 and at the same time they I think announced price controls I believe it was the same time he announced the closing of the gold window okay so um that was the end of the gold standard and then we see from 1970 went on I showed you the figures what happens even though it's kind of phony gold standard there was still the US still couldn't inflate as much as it wanted to okay because at some point and it did come about you know they would the goal would be demanded in exchange for dollars but again so prices from 1905 to 71 on through on 2007 rose the third bullet point putting toppled rose by six hundred percent okay um well five or hundred percent excuse me there were five times higher okay and most of that are much of that happened in 1970s and that when we had a big the proble dip recession from 1980 through 1980 82 so I meant to point out what a shock we have had a phrase that caught on and that was that the Gold Exchange standard allowed the United States to run a deficit without tears meaning that as long as foreign company a countries would accept art paper dollars and send us real goods that there was absolutely no adverse consequences to expanding the money supply after that in 1973 they try to reestablish or actually right after um yeah I think was that may be thanking 72 they tried to reestablish fixed exchange rates but with no gold and it was called the Smithsonian agreement and at the time Richard Nixon said this is the greatest agreement monetary agreement in the history of mankind it collapsed 13 months later as did Nixon's regime a few few months after that so now there were there was sort of dirty floating and if I go back and show you that no one was really satisfied with dirty floating from 1973 to 1980 meaning all governments try to control the values of their currencies in the foreign exchange markets but the point is that if you try to lower the value of your currency if you try to devalue or depreciate your currency by printing more dollars let's say and pushing your prices up which means then your currency becomes less valuable how are they going to respond however the other country is going to expect respond by doing the same thing so you began to get competitive devaluations everybody trying to sell more exports by making their their their currencies cheaper and that includes didn't work so we moved on in the 1980s they tried to have central bank cooperation in the 80s and that I mean that worked somewhat the u.s. from 1981 to 1984 the US currency was very very strong and that's when the US auto industry became very very uncompetitive okay not only what what were US autos nothing not not very competitive sort of or not as good as a lot of foreign automakers or their products but also the value of the dollar had gone up quite a bit so it was very expensive to buy us or Nabeel to export us or Nabeel so that point the or us Auto the manufacturers and the unions and and others began to pressure the Reagan administration pressure the congressmen to put to force the value of the dollar down so what we did was we got Germany and Japan together and what we did was we forced them to allow our dollar to depreciate from 1985 to 1987 meaning we print a lot more dollars and the value of our dollar went down in terms of the germ of the german mark and the japanese yen so we sold more goods abroad okay and we cut and and and we bought fewer of their exports because who's hurt when when you force the value of your currency down your own consumers are hurt they have to pay higher prices they have to pay more dollars to get a yen to import a Japanese um good or to purchase a mark okay so it it it was a decline in US standards of living so finally be prior to that the monetarists who were very influential in the early Reagan administration okay they believe that freely floating exchange rates where you have the free market setting the rates of these nationally nationally monopolized monies okay with no interference from governments just allowing the rates to fluctuate would cause no more balance of payments problems in other words if one country inflated prices went up by 20 percent well then the value of its currency would go down by 20 percent and there wouldn't be any advantage okay so you would be just there'll be no balance of payments deficits or surpluses okay the market would automatically establish the the foreign exchanges at levels in which it didn't matter whether you bought in from one country or another you know giving him the same good okay so that was the monstrous dream and they said that they wanted no governments of Ference they said this was called no balance of payments crises had a few other things they said there will be no instability of the price level because if you didn't import or ex or gold when gold came into your country you had inflation when go left your country you had deflation or under the Bretton Woods system when when dollars poured into your country you had inflation okay so what they said was if you have fluctuating exchange rates then there is no key currency there is no gold flowing to and fro the market would adjust and if you had a bad performance if your if you had inflation then it was all your own fault okay inflation could no longer be imported or exported okay under the the system of freely floating exchange rates and they were half right about that okay so they said then you could blame your own Monetary Authority and finally they point out that all the government needed to do to avoid recession and inflation was to pursue a responsible fiscal and monetary policy but the whole point is the government still has a monopoly now what incentive is there for to pursue evolve a responsible prudent fiscal policy and monetary policy in other words what incentive was there not to spend so that you have deficits and then to finance those deficits by simply printing money and and and using the by government bonds there wasn't any incentive any longer okay even under the the Bretton Woods system at least there was a possibility that you would you lose gold or if you were another country you would lose dollars if you inflated too much beyond what everybody else was inflating so in fact we got inflation continuing we got bad performance continuing and as I showed you things got pretty bad so so back in the nineteen it when we got the 1985 to 1987 there was all this pressure from special interest groups to drive the rate down so freely fluctuating exchange it's only let's for a few years there's always pressure to get the government involved to help the export industries and that's exactly what happens okay so the mantras dream turned into a nightmare a nightmarish reality okay so um so they gave political institutions complete control of the money supply no constraint buy gold there was tremendous fiscal irresponsibility all governments like to spend does that get some votes but they don't like to raise taxes because then the people who who don't get the government largess okay who do not are not the benefits of the government spending they find their prices going up and they get less and less okay because of inflation or rather because it's taken out their pockets through taxes and it's obvious where the taxes are being or redistributing income but now that's not true of inflation it takes a while for the public to catch on okay so you got fiscal irresponsibility because you could hide it behind the veil of printing money okay and say look you know this is great everybody's going back to work and so on and so forth but during the inflation people who are not getting that new money first from the government people who are not favorites of the government were hurting also the government's manipulated interest rate or manipulated the exchange rate because they wanted to make the currency cheaper they wanted to support export industries who are very powerful so they made the currency cheaper and that did initially the prices that take a while to adjust so if you print more money you'll find that your currency will cheapen before your prices go up and that means that your export industry for a while will have an advantage in selling abroad so what will happen is that mortgage we sold abroad and consumers because the dollar is cheaper will not be able to buy as many imports so consumer standard of living will be hurt and more hurt during the eighties and on the other hand you had all these benefits surreptitiously secretly being bestowed on the export industries okay so now let me just talk about some perspective monetary systems that others have put forth Keynesian is mainly when all this stuff was happening the Keynesian began to say they began sort of in the late eighties early 90s to say fixed exchange rates are better we they are better but not not with gold the gold is terrible okay what we want basically is a movement towards either big central banks cooperating with one another and fixing arbitrarily fixing the exchange rates or one one accomplices will see even proposed a one-world money so this all happened during in 1980 in 1990 they saw their chance they always wanted a one-world money that and once you got that of course then there's no barriers against inflation the important thing with fluctuating exchange rates is that you still have one chance left to get out of the whole thing and that is you could at least buy other currencies that you thought were going to increase in value all your currency was decreasing so you could there could be a run from the cut from the US dollar which would cause the government to say wait a minute the value of our dollars really falling everybody's dumping dollars and they didn't want that to happen ok so that was the one merit of fluctuating exchange rates however if you get Central Bank cooperation then as the Keynesian wanted then you could all inflate at the same rate and even worse there's then there's nowhere to go every currency is being depreciated at the same rate or even worse if you create these um fiat reserves to back up some kind of world money sort of like the EU to back up the euro um or the Euro sort of tore the code of the one the one monetary area currency okay then there's no there's no no escape from inflation which all governments as I pointed out or prone to okay they don't want to spend more but they don't want to raise taxes so all governments are inherently inflationary okay so let me just mention a few of these crazy schemes the first was called crawling target zones okay was put forward by an IMF bureaucrat named John Williamson and a former Carter Treasury bureaucrat named C fred Bergsten never trust people who said that the see instead the full full first name but anyway what they wanted to do was to fix exchange rates at the fundamental equilibrium level okay who's gonna find out the fundamental equilibrium level right well the bureaucrat to determine what they are you know through various formulas and so on okay now if some countries were prone to inflation like less developed countries or countries that could not control inflation like little e they make an exception for them there they would have a crawling target zone with soft buffers so think of it can you think of any more bureaucratic terminology I mean this is the product of a bureaucratic mind crawling target zones with soft buffers meaning that the zones themselves would be shifting so so you would be allowed to keep your exchange rates within his own but then the zone itself would be falling so that you could cheapen your currency over time but very slowly okay a version of that has been used in the last few decades certainly the certainly since the 90s by less developed countries they tend to use these they're now call crawling pegs where you adjust the peg every month you Peggy peg to some stronger currency but you recognize that you're going to inflate think about that basically you want on flight so you're going to inflate by pretending you're not inflating by having a scrolling peg so you you would reduce the value of your currency one percent every every month or so okay so under these crawling target zones all the god the big government's would get together and they would agree to a targeted growth of total domestic spending okay so everybody would try to fix their domestic spend that would increase their domestic spending meaning government spending at a certain rate okay and they would coordinate monetary policy with that they would all try to keep their interest rates the same so what that meant was everybody could inflate in tandem okay you would have everybody inflating in unison then Ronald MacKinnon who actually did a good good economist from Stanford he came out out up with a proposal for a Gulf standard without gold that's what we call the gold standard without gold okay so what he wanted to do was to fix the exchange rates of only the three main currencies the mark the N and the dollar within a narrow band okay they be fixed it's one another like they could fluctuate a little bit and then together they would all change their interest rates to make sure that nobody was inflating any faster than anybody else they would have some sort of a target for that they would they would use these short-term interest rates of fed users so again the whole point of that was to allow an orderly inflation okay to get rid of all these fluctuations but to allow everybody to inflate and then finally Richard and Cooper and you can expect much more than this from our Yale economist proposed a world fiat currency in exchange for government securities so in other words this is the old Keynes plan everybody if government's wanted to get their secured to get increased money supplies they would have to give them to sell their bonds to to this world authority which would issue issue this sort of world reserves really and then based on those reserves you could then increase your money supply okay and then you'll be able to finance your budget deficits well in some sense a euro is a version of this so it's definitely a version of this so even these crazy ideas I mean when their stated people you know most people didn't accept these ideas when it first stays in the late 80s early 90s but they just work their way into the academic literature and and finally to the policymakers and then this is what happens okay it's just the way the Keynesianism spread so what do I see for the future none of these schemes have brought greater order into the monetary system we still have now problems with with a sovereign default it didn't bring even more order into the inflation process even in the in the eurozone is inflation at different rates and so on so the bottom line is that we're just going to continue to lurch along until a significant currency breaks down or there is some sort of run on the dollar okay if Trust is lost in the dollar at some point now the Chinese and the Brazilians have made the point of either and and somebody from the World Bank also and I forget his name made the point that maybe we should look at setting the value you're going to a sort of a some sort of some sort of a gold standard commodity standard okay getting rid of the dollar as as the it's not the key currency any longer but it's it's the currency that it's the reserve currency of the world people still got most governments still hold a dollar okay in large quantities right so a bottom line is there is a silver lining to the dark cloud that I've been painting here and that is that I think we're going to see a movement back towards people at least taking a look at commodity money again okay back towards the best and away from from this stuff okay I don't think it's gonna happen soon but I think there's gonna be some small steps taken and hopefully countries like China that don't want to be duped like the Europeans wore during a Bretton Woods system it might lead the way okay I'll stop here and take questions I have five minutes any questions yes what do I think of the IMF trying to set policy recommendations for the less developed countries is the question I think they I don't think that anyone should listen to them or take them seriously okay because when I talk about austerity what they mean is an increase in taxes on the backs of the productive in those countries and and and sort of sir minor cuts in government spending they there are some market market oriented economists working at the IMF who who are trying to re-establish markets but I don't think you establish it by an outside bureaucracy issuing edicts in exchange in other words you're bribing these countries to do certain things that are going to hurt parts of their populace and rightly or wrongly that's going to be perceived as outside interference and that's gonna people are gonna resent it and and people are calling it market reforms or you know or austerity policies but in the right the Austrians have all are in favor of our sincerity policies in the right sense that is you cut government spending and you cut taxes okay so that tells that you have a less destruction of resources by government so I don't I don't think they should be listened to and I don't think that their um their loans should be taken by by these countries I think they should just simply default on their loans on the sovereign debt it why should why should taxpayers in those countries be obligated to pay for the debt incurred by many cases dictators okay so in international economics books they call Tet the debts had incurred by dictators we don't like call them the corrosive debt but by dictators and parties that we like in various countries well though you have to pay those back and those usually the countries that US banks of from whom US banks buy debt okay so it's really a bailing out of US banks we have one more question time for one more question okay and thank you

Channel: misesmedia

Views: 6,256

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Keywords: International, Monetary, Systems, Austrian, Economics, Joe, Joseph, Salerno, Ludwig, von, Mises, Institute, University, Fed, Bank

Id: wsmUxeFrCV8

Length: 57min 24sec (3444 seconds)

Published: Fri Aug 31 2012