 My lecture this morning is on international monetary systems, which is a particularly relevant topic given what's going on in the world and what is likely in store for the dollar in the future. Really to understand what can happen to the dollar, we have to look at where it came from. In other words, we have to look at what was the original monetary system that the whole world more or less embraced. And before we actually get into that, into the details of the gold standard, I want to talk a little bit about the categories as they would be looked on by Austrians and by the mainstream. So Austrians would categorize monetary systems in a different way than would mainstream economists. If you've taken international economics, you're told that there are two types, two general kinds, of monetary systems. One is an affixed exchange rate system, and the other kind is a fluctuating exchange rates. And there are different type, there are different specimens of each kind. So for example, in your international economics textbook, what they would do is to group into one category the worst possible monetary system, which could be the Keynesian dream, where you would have a world central bank. You'd have a single central bank. So there would be no fluctuating exchange rates between monies of different countries because there would only be one world money. They would group that in with the best, the 100% gold standard or the classical gold standard, which supposedly have fixed exchange rates between different national currencies. So they would be looked on as in one category. And then on the other side, they would have the so-called floating exchange rate or rather fluctuating exchange rates or flexible exchange rates. And those systems have the characteristic that the rates of exchange between different national monies are subject to fluctuation either minute by minute on the market or by government intervening frequently or less frequently to change exchange rates between different currencies. We'll talk about what exchange rates are. This is completely fallacious, this approach to international monetary systems. The approach that Austrians would hold and that I sort of come up with a diagram that to represent is this one. So we have the best all the way on the left. All monies were initially market supplied commodity money. And so that on the left side, we've included the 100% gold standard, the so-called fixed exchange rate system, and the classical gold standard. Now the classical gold standard, as we'll see in a moment, did have some government intervention. And even in some cases, there were central banks. But basically the money was determined, the money supply was determined by the market. As we move to the right, the systems get progressively worse. So we have the classical gold standard from 1821 to 1923. That was the heyday of the classical gold standard. Prior to that, as we go back in time, almost all monies originated as weights of gold. So all monies originated as really 100% gold or silver or some other useful commodity. And then the progressive interventions undermined the 100% market commodity money. And we moved towards the classical gold standard, which again, compared to today's system, I wouldn't say optimal, but it's far superior, far more anti-inflationary. It had very little inflation under the classical gold standard. Then there was a breakdown. Well, we went off to the gold standard in 1933, and I'll talk about that. That lasted through World War II. And they wanted to reestablish the stability of the gold standard, but they didn't really want gold. They wanted government manipulation. Most of the allied governments, the US and Great Britain in particular. So we moved to something called fixed exchange rates based on one currency, the dollar, being slightly or converted to gold in a very restricted sense, as we'll see. That was to call the Bretton Woods system. We lived with that system from 1946 to 1971. It was a phony or pseudo gold standard. It only really just had a gold veneer. It was really just fiat monies that were tied together by fixed exchange rates. With the US dollar as what's called the key currency. Get to that. And as the Austrians predicted in the 1950s, this system broke down in 1968 to 1971 and underwent a slow-motion crash. Actually, we had tried to system out for a while in some of the minor countries in Europe from 1925 to 1931. And it didn't work then. It's called the gold exchange standard. We then went back to something called floating exchange rates for a while from the 1970s. We had what's called dirty floating, meaning that the markets determined the exchange rates between the different government monopolized fiat monies, like the dollar, the yen, the German mark, the British pound, and so on. But governments went into fear if they didn't like the movements of the exchange rate. That is the price of the foreign currency in terms of their own currency. Because by changing those exchange rates, you can affect international trade. You can make your imports more attractive to foreign buyers. Your exports more attractive to foreign buyers. And you can put a damper on the amount of imports that are coming into your country. So you can protect local industry in that way. By the early 1980s, when Reagan came in, there was a lot of monetarist influence in his administration. And they were in favor of free markets. They didn't like the gold standard because they thought that was a fixed, that was a price-fixing scheme. It was a fixed exchange rate. The government was fixing the price. The price of gold in the US from 1834 until 1933, for about 100 years, was legally fixed as $20 per ounce. But as we'll see, that's really a fixed exchange rate. So they wanted the market to determine exchange rates. That occurred from about 1981 or so to 1984. That was freely floating. That's better than some of these other sort of government monopolized fiat regimes because it tells the story about what your currency is really worth. It shows how inflationary your central bank is. These are the other central banks. But very quickly, people got sick of those because you can't really use exchange rates to favor your own industries at the expense of foreign industries. So we moved to dirty floating in the 1980s. And to the present, we have a system of what's called dirty floating where different currencies. There is a foreign exchange market. Their values are determined on the foreign exchange market. But governments intervene very frequently to buy and sell currencies to change the exchange rates from what the market would determine. So basically, the Austrian dream is to go back to sort of one world money, a gold standard. And at the bottom, you see the monetarist dream is to have every country or every central bank should have a full monopoly over its own national currency. That's called central bank independence. And I'll explain why they would want that. The Keynesians would love to have a world central bank. That just poured out paper money to the various governments and allowed them to inflate on top of that paper money. Okay, so we'll come back to that too in more detail. Needless to say, since we went off the gold standard, the world went off the gold standard 1914 and they came back somewhat in the 1920s. But since the early 1930s when they definitively left the gold standard, the monetary system has lurched from one crisis to another crisis. There have been crises after crisis. And all of these plans and all of these interventions by government sort of try to get rid of these crises. But you can't unless you move back towards the left, back towards the 100% gold standard. So let's just talk a little bit about the classical gold standard and how it operated. Okay, let me just describe it very briefly. The US was on the gold standard from 1834 to 1933. That is on a single monetary commodity, which was gold. Not legally, but in fact, gold was the money from 1834 to 1933. Now, the main characteristic of the classical gold standard was that each currency was defined as a weight of gold. So to give you an example of this, I'll take the US currency and the British currency. So the US currency for those 100 years was defined as $1 was equal to 23.22 grains of gold. We're about a 1.25 ounce of gold. In other words, the dollar didn't trade for that. That was the definition of the dollar. The definition of the dollar was a weight of gold, 1.25 ounce, and that was the legal definition of the dollar. In the case of Great Britain, the pound was defined from 1821 to 1931 as 113 grains of gold, which is about 1.25 ounce of gold. Now the monetary, so therefore, if you divide 113 grains by 23.22 grains, it tells you that there's about five times as much gold, or there was five times as much gold that the British pound represented as compared to the US dollar. So therefore, exchange rate was $4.86 per British pound. That was the exchange rate. Now the monetary claim that this is a price or an exchange rate, but it's no more of a price or an exchange rate than is the fact that five nickels exchange for one quarter. It's just the laws of arithmetic because a nickel is defined as 1.20 of a US dollar, and a quarter is defined as 1.4 of US dollar. So there's five times more dollar that you can get with a quarter than you can with a nickel. And so by laws of arithmetic, the ratio is five to one. Trade, you have to give a five nickels to get one quarter. They're the same money, okay? They're just different units of the same money, which is the dollar. And under the classical gold standard, the dollar and the pound were the same money. They were just different weight units. And the French franc was defined as about one fifth of what a dollar was defined at in terms of gold. So it took about five francs to buy one dollar. So all the exchange rates, and exchange rates are bad word because it implies that there's some market where this exchange rate is determined. But it should give you pause. The fact that these exchange rates didn't fluctuate. They were fixed for all that time. In fact, if you looked at the so-called paper representative of the dollar back then, for example, a silver certificate, it says that you are entitled to $10 payable in silver coin to the bearer on demand. It was a redemption ticket. You didn't go into a bank or go to the treasury and sell the dollar and sell $10 for a half an ounce of gold. In fact, the central bank was contractually bound, or in this case, the treasury, we didn't have a central bank then. The treasury was contractually bound to pay out one ounce of gold for every $20 that people turned in. And fractions thereof. So if you turn into $10, you've got one half of an ounce of gold. It was simply the same thing as a receipt to pick up your shirts at the dry cleaners. It was a contractual obligation. Here's some other examples very quickly. This is a $50 gold certificate and you have to read something similar here. United States of America, $50 in gold coin payable to the bearer on demand. There's no negotiating over price. We pay you, that's two and a half ounces of gold. We pay you two ounces of gold for that $50. Is there a supply and demand going on here? Is there any bargaining? No, of course not. It was your property. They were holding your property in the US treasury. Finally, and I didn't realize a bill of this big a denomination existed, but it's great. This is a $100,000 gold certificate from 1934. So if you figure prices have probably risen by over 10 times, it's really a million dollars in today's dollars, over a million dollars in today's dollars, okay? It'd be great to have high denomination bills back because the government can't track them. That's why the government has progressively, US government has progressively reduced the denomination. So it used to, up until the mid 1960s, 1964 or so, there was a $10,000 bill, $5,000 bill, $1,000 bill. Some of them had not been printed since the early 50s or late 40s, whatever it is. But those bills existed, so you can make big business transactions with them. Now they've used the cover of the war on drugs to continually reduce these denominations, okay? Getting rid of the $500 bill, and now we only have the $100 bill, which is worth, in 1970, let's say, 1970 dollars is worth, you know, 20 cents. I'm sorry, $20, $100 bill, okay? This price has increased by about five times over that period of time. So the $100 bill is worth, really, $10 in terms of the 19, or actually less, it's worth $5 in terms of the 1913 pre-fed gold dollar. So the denomination's extremely small, it's extremely inefficient not to have bigger denomination bills. On a free market, you would see bigger denomination bills. Okay, so let me just say a few other things about the gold standard. It may or may not involve a central bank. We did not have a central bank on the classical gold standard until 1913. However, Great Britain, the Bank of England, existed from about 1694 or so onward. So there was a, there is room on the classical gold standard for a central bank. However, as we'll see in a moment, the central bank was constrained by the anti-inflationary characteristics of a market commodity money. There was also under the gold standard gold coin in circulation among the public, okay? Even among the low income earners, okay? There were small gold coins in circulation and also silver coins to the extent that there was a second medal in the monetary system. What were the principles of operation? As I mentioned, there was no, there was not a system of fixed exchange rates. It was a system of one world money, okay, or two world monies if you include silver, which traded at a fixed rate between different national currencies because they were all defined as different weights of the same commodity, as I mentioned. Now, what was the anti-inflationary characteristic of the gold standard? Sometimes called the golden handcuffs, okay? It suppressed government attempts to increase the money supply. Well, let's take a look at a representation of the classical gold standard. It's often drawn as an inverted pyramid and this is not optimal. Under a 100% gold standard, this would be, what would the shape be in a 100% gold standard? It would be a rectangle, absolutely, okay? Okay, so at the bottom we have $2 billion in gold reserves held by the banks or if you want, if this is Great Britain, let's say it's held by the central bank or you can think of the US after 1913, it's held by the Fed. Now, let's assume that by law or by custom, they maintain 40% reserves against their own notes. So the Bank of England or the Fed, let's say, can issue its own notes. So if they have $2 billion in gold reserves and the reserve ratio is 40%, that means that they can issue two and a half times that in the form of paper notes. Now, so they issue $5 billion. And let's say that the commercial banks, the banks that the public deal with, have a reserve ratio, a legal reserve ratio of 20%, meaning that they can multiply by five, the entire banking system that is, the amount of reserves they hold. So let's assume for a moment that people don't hold Fed notes, but all the Fed notes are kept in the commercial banks and people use checking accounts or the commercial bank notes themselves. There was up until the 1870s, up until the 1860s, there were different bank notes in circulation, the big taxes put on them under the National Bank Act and only the larger banks issued notes. But in any case, that means they're able to issue on the basis of a reserve of $5 billion, $25 billion. So the total money supply in the economy, let's say is $25 billion. Now let's say as a result of a war or some other national emergency, the Central Bank, by the urging of the government, is determined to increase the money supply. So what they do then is they cut their reserve ratio to 33 and third percent, that is they have to hold one third of their liabilities, their note liabilities in the form of gold, so they now can expand their gold notes. Without any more gold, they can expand their bank notes to $6 billion. That increases the reserves of the commercial banks. They can now increase their checking account liabilities and their note liabilities, and so the money supply increases by 20% from 25 billion to 30 billion. So now we have an inflation. Now prices start to go up. Well, I mean, where is the, where are the whole golden handcuffs here? Can't they keep increasing the money supply this way just by reducing the reserve ratio? Well, in fact, there's something called a price-species flow mechanism, which was discovered in the mid-18th century by a number of economists, and one of the most famous of whom was David Hume, and he explained as follows. On the classical gold standard, if the US MS stands for the US money supply, subscript US stands for the US, they increase their money supply. Eventually, prices in the US are going to rise. So US prices rise. Okay, they see the upward hour, they go up. Above world prices. Suddenly now it's more expensive to buy from the US and it's more profitable to sell in the US. So foreign countries begins selling more imports to the US. We import more. And on the other hand, the export of US goods is discouraged. So eventually the balance of payments becomes negative. The US begins purchasing more from abroad because of the relatively lower world prices than it's selling abroad to foreign countries. As a result of that, there's a balance of payments deficit. Now under the gold standard, how is payment made? Well, foreign exporters don't want US dollars. They want something that they want to use their own money or gold because their own money is defined in terms of gold. So eventually gold will be shipped out of the US to foreign countries. And I'm really simplifying because in the meantime, there'll be sort of capital movements, okay? The US will raise its interest rates because it's losing gold, but gold is being lost. Now, the banks then begin to get worried. The central bank will worry because it sees its gold reserves disappearing. And as people see gold reserves disappearing, US citizens, not only do you have the external drain due to the balance of payments deficit, you have what is also called an internal drain. People begin to lose confidence in the banking system, which is always very shaky because it is a fractured reserve banking system, and they begin to cash in their notes and deposits in exchange for gold. So you could have a situation where if the balance of payments deficit is $1 billion, they could lose half their gold stock. They're holding $2 billion. But as gold's flowing out, both internally and externally, the central bank will react, okay? And it will cut back on, it will contract its notes. Okay, and it'll do that either by raising the interest rate that it charged the banks to borrow, okay, or it could do it through open market operations by simply selling different assets that it has. So it'll contract the money supply. And as that happens, so the gold flows out of the US, eventually the US money supply is contracted by the central bank, becomes fearful of losing all its gold reserves, and US prices then fall below world prices, and the whole gold drain reverses itself because now it's better to buy in the US and it's less attractive to sell in the US because US prices are falling, okay? And so then we have a balance of pay, actually greater than zero, balance of payments is greater than zero, and gold flows back into the US. So now that anti-inflation mechanism, that price-species flow mechanism, species simply means precious metals, gold and silver. So when there's a change in the money supply, prices change, okay, money supply goes up, prices go up, setting off a flow of gold out of the country, and that results in a mechanism that constrains the further inflation. And this worked quite well. During the period when the US was on the gold standard, especially from 1834, actually even earlier when we had gold and silver circulation from 1800 to 1896, almost 100 years, prices were lower in 1896 than they were in 1800. They fell. Now, that's another characteristic of the gold standard. Under the gold standard, the money supply increases very, very slowly because the central banks are constrained by the loss of reserves that occurs through the price-species flow mechanism. Now, as a result, gold, money can only increase at about the rate, the money supply can only increase at about the rate that gold monetary gold increases, through gold mining and so on. So as that occurs, you get a slow increase in the money supply, but in a capitalist economy, it's the natural outcome of a capitalist economy that people tend to save more and more and as they get richer, their time preference is full, that is their preference for present satisfactions falls because now they are better supplied in the present and they begin to save and invest even more for the future. So it's a sort of self-reinforcing process. You have capital goods growing, you have labor productivity increasing, so you'll have a much quicker, faster increase in the supply of goods in the economy than you will in the money supply, which means that supply of different products will shift out much faster than the demand for those products and prices will fall. And so during the decade of greatest period of growth in US history from 1880 to 1890, and even if you go from 1880 to 1896, you had a US economy growing at around 5% per year, very, very high by today's standards and prices falling by 2% or 3% every year. So we had a boom, but we had a deflation and I call that a growth deflation. That actually happened to China right before they started inflating at the beginning of the last decade, late 90s, early part of 2000. Chinese price were actually falling and yet they were growing at a very rapid rate. That was a growth deflation. They weren't increasing their money supply as quickly as the supply of goods was increasing. Okay, so that's another property of the gold standard, that it's a prices gently fall over time. And that also happened in Great Britain and other countries. Now, as I said, in 1933, the US went off the gold standard and Britain had gone off in 1931, okay, under the influence of John Maynard Keynes. And the reason why they went off was because they wanted to get rid of the discipline of the price-specific flow mechanism. And so all countries then, by 1936, France and Switzerland and a number of other countries went off and so the gold standard was defunct, at least until the end of World War II, when it came back in a very attenuated form. But in the US, what did that mean? That meant that everyone had to turn in their gold for dollars, except licensed jewelers and licensed dentists. No one was allowed to own gold, okay? You could own jewelry, you could own the gold in your teeth, but nobody could own gold coins. You couldn't even own gold held for you in other countries. Okay, that was against the law. We couldn't hold gold again, we couldn't own gold again, that is American citizens, until 1976. And also it meant that President Roosevelt could then devalue the dollar. That is, lower its, raise its price in terms of gold. So it was eventually raised from $20 to $35 per ounce, and then he manipulated that. He thought by decreasing the amount of gold in a dollar, it went from a one-twentieth to one-thirty-fifth of an ounce of gold, he could inflate the price level. And by increasing prices in the US, he felt that he could get US economy out of the depression. In this, he was under the influence of two crazed agricultural economists. Okay, no offense to Peter Klein. But they really gave this very bad advice. Okay, so what happened? Basically, world trade investment almost came to a stand still. Everyone tried to devalue their currencies, they tried to make their currencies worth less, because if their currencies were worth less in terms of the foreign currency, foreigners would buy more of their goods. And so there would be more demand for their exports and that would create more jobs. At least everyone felt that way, all different governments felt that way. And it could happen in the short run, but of course, how did the other countries that were being beggared, it's called beggar thy neighbor policies, how would they respond? They would devalue their currency, okay? So it was inflationary spiral, because the way you would devalue your currency is by creating more money and making it less valuable on foreign exchange markets. The more money you create, the more it gets on the foreign exchange markets, the greater supply of your currency, the lower its value will be in terms of foreign currencies. And then we also had currency blocks where different countries got together and had fixed exchange rates between their own currencies. We had bilateral trade. We had countries really barring with one another. Germany did this quite a bit with other countries and I guess Britain to a certain extent with its colonies and so on. So it was a terrible system from 1933 until 1946. And the allies were determined to get rid of the system after the war and to go back to some sort of approximation of a gold standard or a fixed exchange rate system, which they thought the gold standard was, but without the dreaded price, PC flow mechanism. And what they would say is we don't want governments to have their policies determined by foreign exchange considerations, okay? So they came up with a system, this crazy system called the Gold Exchange Standard, which I said was tried in the 20s for a little while. And it was negotiated at Bretton Woods, which was a resort, very upscale resort. You know, these guys don't go to a holiday in when these bureaucrats when they get together, they go to the nicest places. It was in New Hampshire. And it had a few key features. One was that there would only be one or two key currencies. Initially they thought it would be the US and the pound, but the pound was very weak. There was a lot of inflation during World War II by the Bank of England. So the US dollar wound up being the single key currency. Now the single key currency was the only currency that was fixed in terms of gold that had its value defined in terms of gold. So the US dollar was fixed at $35 per ounce of gold. Now that didn't mean that you or I could convert or our parents and grandparents could convert their dollars into gold. We weren't able to do that. There was to be no gold in circulation. Gold dollars could only be converted by foreign official institutions, mainly foreign central banks and foreign governments. A huge bureaucracy was set up, the International Monetary Fund to administer this whole system. The other currencies, France, Germany, Great Britain and so on, fixed their currencies in terms of the US dollar. So their currency in effect was backed up by the dollar because the dollar was very strong. We had a lot of gold reserves. A lot of gold had flown into the US during World War II. So in effect, as I said, the non key currencies were backed not by gold but by US dollars. And foreign governments were willing to accept US dollars because as we'll see, since the gold stock in the US, since there was no liability to pay US citizens with that gold, the dollars they were holding, there was more gold than there were foreign liabilities initially. In fact, it looks something like this. When this whole system started, you just look at the top line, the second line, 1950, the US had $25 billion, which was more than half of the world's gold stock in its possession. And foreign liabilities, that is the dollars that were held abroad that could be converted to gold were only $12 billion, okay? That all changed and I'll get to why it changed. But let's talk about its operation, okay? You couldn't set up a better system to create world inflation if you tried. And this was pointed out by Henry Hazlett, almost immediately. Ludwig von Mises also pointed out that this was not really a gold standard at all, that it was a pseudo-goal standard. What a friend and a fellow monetary economist who was a sound money economist and pro-goal standard, Jacquesou F, was probably the most famous critic of the Bretton Woods system. And I'll explain why. Now, what happened was, once you had the US being really a key currency, you had a very odd sort of triangle here. US held gold, okay? Based on that gold, the Federal Reserve then printed up Fed notes that we'd hold in our wallets and so on, and also deposits that banks used as reserves for their own checking accounts. So the commercial bank deposits then were pyramided on top of the reserves of the US, these are US commercial banks. But now that money, those deposits were used to back up foreign currency and commercial bank deposits, okay? So foreign banks, instead of using gold, directly used dollars held in checking accounts here in the US, for the most part, they didn't actually hold US currency, okay? They held US checking accounts or interest-bearing deposits or US Treasury securities. So now what did that mean about the balance of payments? So if we go back to this diagram, under the Bretton Woods system, if the US inflated and the US began to inflate very rapidly in the mid-1960s, the reason was we were trying to finance both the very costly Vietnam War and at the same time, the Great Society programs, the welfare programs, the war on poverty and so on of Lyndon Johnson and who promised us, as all politicians do, that we could have both guns, that is, the war itself, and butter, consumer goods. So he did not raise, he didn't want to raise taxes on the US citizens because wars are incredibly expensive and when you see that as reflected in your tax bill, the war's become very unpopular very quickly. So here's what happened under the Bretton Woods system. US increases the money supply, US prices rise above world prices. Our exports go down, of course. These are so expensive and imports go up and there was a lot of US tourism that was generated in the 1960s into Great Britain. That's also an import into Europe itself, rather. We then run a balance of payments deficit. Now, we didn't run a balance of trade deficit until about 1971, but we were sending a lot of foreign aid. We had all of these non-trade items that caused dollar outflows. We were paying our troops and so on. So we had overall, even though we actually had a surplus on our balance of trade or our current account, overall the balance of payments was negative. So we were sending dollars out. Now, did that mean we had to send gold out? No, because the foreign governments, based on the fact that the US had this big gold stock, believed that the dollar was as good as gold. Now, Jacquesouef called this system a deficit without tears. We never had to, we never lost any gold. Gold was never demanded, later on it was by France, but as a result, there was no cost of running these deficits. So think about it. We were sending paper to these foreign countries during the 1960s and getting real goods and services in exchange and they were simply doing what? Once those dollars went to the exporters, what did the exporters do? Or to the restaurant tours who were serving the American tourists and so on and the people who owned hotels and so on, but they don't want to keep those dollars. They want their own medium of exchange. They want francs. They want pounds. They want marks. So they went to their central banks and exchanged them for, or went to their banks, exchanged them for US, exchanged them for their own local currencies and then the banks turned around and went to the deposited those dollars with the central bank and in exchange got their own currencies. Now, where did that additional currency come from? That additional local currency come from that was given to the banks who had just increased the deposits for their customers as the customers turned into dollars. They printed them up. So this was a system that created world inflation. So what eventually happened was that all world prices rose and then we'd have another round of inflation and then the whole thing would occur again. There was no constraint on the US balance of payments. Okay? Or rather, I'm sorry, on the US budget. US could continue to run budget deficits. They could therefore print money to pay for those deficits and even if that created a balance of payments, they didn't lose any of the gold. Okay, now that wasn't till the 1960s because at some time, in the early 1960s, France began to lose its confidence that the US could pay up in gold. So they began a gold buying program in 1962. And the US gold stock began to shrink. I have the figures here for you. So by 1961, our gold stock went down to 17 billion. Part of that was due to the fact that by 1958, the European countries got their houses in order and began and got the budgets in order and made their currencies convertible. And so that they didn't have inflation. We became the relatively more inflationary economy after 1958. And then between, in the mid-60s, the gold stock fell further to 12 billion then it hit a low of 10 billion in 1968. All the while, foreign liabilities were growing because more and more dollars were piling up in these foreign central banks. And it grew from 25 billion in the mid-1960s. It was only up to 60 billion. So now there's $60 billion outstanding and there's only $10 billion in gold. So everybody's getting nervous. So the French began to demand earlier, a little bit earlier than maybe those 65, began to demand like huge payments in gold for the US. Germany did likewise, but Germany was an occupied country. It was occupied by US troops and we threatened it to pull our troops out and to stop protecting them as we move our nuclear umbrella from Europe. And so Germany knuckled under. France didn't. France dropped out of NATO, didn't give into the blackmail and started their own nuclear force for a while. And they were not part of NATO. Now in 1968, now what's happening? All these dollars are sloshing all around the world and there are free, even though we can't own gold, people in Europe can own gold. So people, there are free gold markets in London and Zurich. So what happens is that these people now find that, look, I can get gold for $35 basically an ounce, okay? By $30 in getting gold. And then I can take the gold to these free markets where there's so many dollars around that the price of gold is up one after $38, $40. And so more gold began to be drained out of the US because foreign central banks now supply more gold to their, they had some gold that supply more to their citizens were turning in dollars for this gold. And then we're selling the gold for a higher price on the free market. So eventually they began to demand more gold from the US and that went down to $10 billion. That's when the US created a two-tier system. They said it doesn't matter what, because the US wants to keep the price of gold throughout the world at $35 an ounce, okay? Because if it goes up in somewhere else in the world, then there's arbitrage opportunities. You can buy it at a fixed price of $35 here and sell it somewhere else. We would lose our gold stock overnight. So to prevent that from happening, what we did was we said, we got all the central banks together, the IMF and the new agreement was no central bank would sell gold that he'd longer for dollars to their citizens, okay? They would only trade gold between themselves. They wouldn't convert dollars into gold for their citizens. So that operated for a while. We continued to inflate, foreign central banks wanted getting nervous by 1971. It was $80 billion in foreign liabilities, private and official, and we only had $9 billion in gold. And there was a run on our gold and because prices kept going up and the US kept trying to keep them down, even though it didn't have to, the price of gold was going up. So by 1971, that's when Nixon closed the gold window and reneged on the solemn pledge made 1946 to convert dollars into gold at $35 an ounce. So all the suckers, the other governments that got stuck with these dollars found this evaluation occurring, okay? And then the price of gold by 1980 had risen to like $800 an ounce, okay? So those dollars were so much less than they had been. And so basically we stiffed the other members of the IMF. And again, this is a great example of how Austrian economic theory made pattern predictions. Now they didn't make exact quantitative predictions and they didn't try to time when this whole thing would collapse. But Austrians all along were saying that the Bretton Woods system is doomed to fail. It's a phony gold standard. It allows the US to inflate ad libidum at will and there was no control on the US and therefore it's going to collapse at some point, okay? And Rueff was saying this in another economist named Michael Halperin who was a follower of Mises as well as Mises and Haslund and everyone else. And so mainstream economists mean why we're denying that. They were saying in fact, prominent names in economics, Milton Friedman, Fritz Maklop, they said if the dollar was no longer convertible into gold anywhere in the world, then the price of gold would fall to its industrial value. It would fall to $10 they were predicting, okay? Whereas the Austrians were saying it's going to skyrocket. So there's definitely a dissertation here to show that, just to go through and look at the predictions that were made all along. So the Austrians and Jacques Rueff and some of the French economists were saying the problem is the US has to adjust. It has to be a price adjustment. The US has to stop inflating the money supply. And we can go back to the gold standard. We have to raise the price of gold. Maybe they wanted to raise to $70. They still think, thought that we could save the Bretton Woods system and restore the classical gold standard under the cover of the Bretton Woods system where everybody would have to hold their own gold reserves and gold would now exchange at $70. In other words, acknowledge the past inflation that the US perpetrated and then just go back to a gold standard. And everyone was saying, you're crazy. All the other economists were saying, gold isn't worth $70. The problem is the deficiency of liquidity. So they started to print what's called paper gold, SDR, special drawing rights, which is fictional gold that the IMF gave out. And so their whole point was that it was really the deficit countries like the US, they weren't really at full, the US and Great Britain. They just needed more liquidity. And the surplus countries like France and Germany, they should help them. When in fact it was the US that was creating all these deficits and creating the surpluses in the other countries by printing money. So the Europeans basically paid for a lot of the Vietnam war and a lot of the war on poverty because US citizens were getting those imports at relatively cheap prices and we were giving away paper and exchange. Paper was being given away in exchange. That then lost its value after the US defaulted on gold convertibility or reneged on gold convertibility. All right, let me just move on to what the monitors want. Okay, so the monitors began beating the drums and saying, this is actually good. It's good that the Bretton Woods standard would collapse. Now they also predicted to their credit that the Bretton Woods standard would collapse. Shreveman also thought it was just a price fixing scheme and that with a price fixing scheme, if you just keep printing money as the US was doing, eventually Gresham's law was gonna kick in and there was gonna be an oversupply of the undervalued currency, which was a dollar and an undersupply of the currency that was more valuable. That is many of the European countries. So that they saw that it would collapse also. But they were happy about it, as were the Austrians, but they wanted to go to flexible or fluctuating exchange rates. And if I just quickly talk about that, basically their reasons were the following. Here's what they said. First of all, the market would now determine the true exchange rates between different currencies. And so the populations of those, the citizens of those countries could see exactly how much their governments were inflating by the depreciation of their currencies against other less inflationary currencies. Secondly, and by the way, Austrians would support, look, if you're gonna have different national fiat currencies, it's better not to have any more interventions and just call them what they are. Monopolize fiat currencies and you should get rid of any idea that you can fix them. In fact, they tried to fix these currencies to one another right after the Bretton Woods system collapsed. They set up something called the Smithsonian system, which President Nixon called the greatest monetary agreement in the history of the world which ignominiously collapsed 13 months later. Because without any goal whatsoever, I mean, it was just, all the countries were increasing their money supply at different rates, so the whole thing just fell apart. Then secondly, the monitors pointed out that there could be no balance of payments crises if you have floating exchange rates because no one, you don't have to hold any reserves. The government does not have to interfere at all in foreign exchange markets. Prices will move to clear the market. There'll never be an oversupply of any currency. If there's too much of that currency on foreign exchange markets, its value will fall. And so then it will stimulate imports and therefore you will get supply equal to demand. You'll never have balance of payments imbalances. But so what would they say? The balance of payments crisis is the way that you control government through the price-PC-flow mechanism from continuing to inflate. So really what they want to do is just get rid of the price-PC-flow mechanism. Because that's when you have balance of payments crisis. When gold flows out, you begin to lose reserves. That's a good thing. That's like the bankruptcy of a private corporation. Okay, third, they said there'll be no instability of the price level when we have fluctuating exchange rates. In other words, let's say the US increases its money supply now. We don't, gold or dollars don't flow out, okay? All that happens is the price of the dollar in terms of the French franc and the mark falls. And they don't have to buy up dollars and increase their own money supplies. So the more responsible nations can prevent the importation of inflation from other countries. This is what Milton Friedman claimed. And in principle, that's correct, okay? But he was actually, he was more interested in deflation. So if a country deflates the money supply, as happened in the US in the 1930s, according to Friedman, the early thirties, well then that doesn't, so your prices fall under deflation and your imports become cheaper, you pull in gold from other countries and then they have deflation, okay? So he's saying neither inflation nor deflation will be imported into responsible countries. Their monetary policy will be dependent solely on their own central bank. It will be driven by external forces. So according to Friedman, then you can put the blame on your own central bank. So it all sounds reasonable. And finally, he said that all that governments need to do to avoid inflation is to follow responsible monetary policies. And there would be no pressure on governments under fluctuating exchange rates to artificially devalue their currencies. That is, let's say it's a recession and you wanna increase your imports. I'm sorry, your exports and you wanna discourage your imports. What would you do? Okay, so under the gold standard, there would be a lot of pressure because now you're, let's say your imports have increased and you're losing money. So people aren't buying your exports from foreign countries. So there's a lot of pressure by the exporting industries when that happens for protection. So Friedman claimed that you wouldn't have that pressure for protection any longer because you wouldn't have these balance of payments crises. You wouldn't have imbalances in exports and imports any longer. Everything would be balanced simply by the movement of the exchange rate. And therefore there would be no more political pressure to have barriers to free trade. So he claimed we'd have a nirvana of free trade. Did any of that happen? Nah, none of it happened. The reason it didn't happen is because governments, once they were free, as bad as the Bretton Wood system was, once they were freed from the constraint of gold, all governments began to inflate and they were inflating at different rates. And as Mises pointed out a long time ago when you inflate at different rates, the first thing that changes is the foreign exchange rate. That price is very sensitive. Speculators forecast the changes and they'll move the foreign exchange rate. So if you increase the money supply, let's say the US does, foreign exchange rate will drop right away because people will expect inflation. But prices won't change for a while, okay? So that means for a while, your prices are really low on foreign markets. That is, your currency has lost value because you've increased the money supply, but your prices haven't gone up yet. So that means your prices look much lower. So if you do that, then other countries are gonna begin to do that. So we didn't get rid of tariffs. We didn't get rid of quotas. We didn't get rid of other forms of protection. It actually became competitive depreciation that we had in the 1930s. Okay, so we had that going on. So from 1981 to 1984, it was a lot of, the US dollar gained a lot of value. And we had a very, very hard time selling automobiles, selling aerospace equipment and so on abroad. And there was a lot of pressure for interventions, protectionism in foreign freight. And it was at that point that the automobile industry put pressure on President Reagan in 1981 to restrict the amount of Japanese cars that were imported into the US through a voluntary export restraint. And it was tremendous pressure from other companies, other companies and corporations throughout the US to have tariffs and quotas. The quotas tightened, the tariffs raised to keep out foreign goods. So that broke down by 1984 of the monetary stream and we went back to this dirty floating, which no one likes, okay? And there's been attempts at cooperation and so on. The Euro area was one way, coming up with the Euro, was one way of sort of getting around all of these uncertainties that would inhibit international trade and investment. But that's again, sort of a scheme that doesn't really have much hope for the future. I mean, since it includes, you're allowing the country to be fiscally independent and run different types of budget deficits while trying to keep a common monetary unit, that's a recipe for disaster. So, let me just mention because we're running out of time that the Keynesians then thought that they saw an end for their great plan for world money, okay? Because when Bretton Woods was initially being negotiated, Keynes wanted sort of a central bank to issue these paper gold called bank cores, okay? A core is a route for gold and bank, sort of gold, paper money or something. And then the US Treasury representative, Harry Dexter White, who was later found out to be a communist spy, came up with the Unitas, a united money, okay? And now Keynesian economists are pushing for a world central bank where the bank would create the reserves for the different countries and all countries would do what? Inflate together, okay? So reserves would then be given out evenly and all countries would inflate together. And this is the worst system because at least with fluctuating exchange rates, people can take their currencies out of those, or take their capital out of those countries whose currencies are depreciating and move them into currencies that are stronger so they can sort of protect their wealth. But with one central bank, that's impossible, okay? So the world money that I had up here, all the way to the right, is the worst possible conceivable system. And it makes sense because it was Keynes's idea. Okay, so I will stop here. Thank you.