 Okay, today 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, in particular international monetary economics, 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, what I consider the worst system, 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 a 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 100% commodity standard, gold, silver, bronze, leather, and so on. I think Philip Bagus spoke about the different types of monies. The second is the classical gold standard, which did have some government interference, but the money was still basically market supplied. Then there's an absolute break. On the right side is the government monopolized fiat money, 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 did not interfere with 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 to 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, but again, both are based on fiat money, government monopolized fiat money. You have central bank cooperation where central banks get together and try to stabilize exchange rates. You have the pseudo-goal standard of 1925 to 1931, so-called gold exchange standard, which was brought back under different guise from 1946 to 1971 as the Bretton Wood system. Finally, you have these Keynesian plans for sort of a one-world money issued by a world central bank. I'll start with the classical gold standard and move over to talking about the Bretton Wood 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. That is that in some sense, to have a gold standard, governments have to follow the rules of the game. 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 as we'll see a central bank or not. In the U.S., it didn't involve a central bank. In Great Britain and other countries, it did involve a central bank. So let's take the U.S. If you take the first bullet point, 80 cents in the year 1914 had the same purchasing power as 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. Jump down to the third bullet point, we had 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 U.S. history. What happened during that period? We had deflation. That is, prices falling. Prices fell by about 18%. That is, you could buy with 82 cents in 1896 what would have cost you more in 1880, a full dollar. That did not in the least hinder the tremendous prosperity, growth in prosperity that occurred during that period. And then from that low point of prices, gold was discovered and there were discoveries and technological innovations in the production of gold so that we had what was called at the time the great inflation. And the great inflation was basically 19% over 19 years. That is, the dollar depreciated in value by about 19%. So of course, you had the dollar 19 to buy in 1914 what you could have bought for a dollar in 1896. That's about 1% per year. And because of the experience 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 macroeconomists today define 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%. Otherwise, deflation is imminent. And then when governments got involved with money, in the US it was the Federal Reserve System which came into operation in 1914. In 1914, what you could have bought for a dollar could now cost you $21.40. 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 our money and our economy. And then just from 1971, and that's the year the final link with gold was broken when President 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 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 five times higher in 2007 than they were in 1971. And then supposedly sometime in the 1980s, central banks finally learned how to address inflation and how to maintain a non-inflationary economy. 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. I 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 look and see why the gold standard was so successful in preventing inflation, in allowing prices to fall as the amount of goods and services in the economy increased. So what was the 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. The U.S. officially went on a gold standard in 1834, lasted for about 100 years. It was in 1933 that Roosevelt stole the gold from the people, that he called it back in, legally mandated that it be returned. So it was legally defined as 23.22 grains of gold, which works out to about a 20th of an ounce of gold. Great. Britain went back on the gold standard after the Napoleonic Wars in 1821, and they went off the gold standard in 1931, so about 110 years. One pound during that period was defined as 113 grains of gold, which was equal to about a quarter of an ounce of gold. Now it was often said that with a $4.86, the exchange rate was a $4.86 cents would buy you one British pound, and so 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 $5 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, it's just arithmetic because a nickel is defined as one 20th of a dollar, a quarter is defined as one 4th of a dollar. So there were no exchange rates under the gold standard. We were all on the same standard. Different countries had different monetary units that were defined in different weights of gold. Now a few things about the classical gold 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 encirculation alongside notes and deposits. But the notes and deposits were not money and they were understood by the holders of those notes and deposits not to be money. In fact, when the government wanted to issue any sort of currency, it had to always specify that it was going to pay beatingly in 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. This is 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 in some cases in exchange than to go and actually take the physical gold. So just as the title to your car that I may sell to, or my car that I may sell to her, is not 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. Gold was money. Notes and deposits were simply certificates that certifying that you had the right, the legal claim on the specific amount of gold. And here's something interesting. It was actually a $100,000 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, to today. It's $100, which is worth, I forget what the figure was, but let's say $100 was worth about $20 in 1970, approximately. So that means that in terms of real purchasing power, the highest bill we have is something that could have bought $20 worth of goods in 1970. Why is that? This is a little off the point, but the reason is that 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 their monies, okay? There was a $10,000 bill in circulation. There was a $5,000 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 $500 bill and so on, $1,000 bill. So it isn't accidental 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 U.S. Okay, the second thing I want to mention is that what constrained 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 price-species flow mechanism. It was really a balance of payment process. And let me explain how it worked. Let me just show you a 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 $2 billion worth of gold. Now if the central bank, when it uses its own notes, has a 40% reserve ratio by law, which the Federal Reserve had a 40% reserve ratio into the 1960s, they would have to hold $2 billion. They could only create $5 billion, we're not looking at the red figures yet. So they create $5 billion. But central bank notes, the notes that we use for cash, are also used by the banking system as their reserves. So when you deposit cash, that's credited to their reserves. And let's assume that the reserve ratio is 20%. That means that when they had $5 billion in reserves, they could create $25 billion of checking deposit money. So let's say that's the current situation. Now let's say the central bank wants to increase the money supply for whatever reason. So what it does then, it increases its central bank notes by $1 billion to $6 billion. And it somehow gets the law changed. So the reserve ratio is now 1 third, 33.3% of all central bank notes have to be backed by gold. Now that means that there's another $1 billion of cash in circulation. When it's deposited in banks, banks have a billion more of reserves. Remember they have a 20% reserve requirement, they have to back up their deposits by either gold or central bank notes, which are claims to gold. So we get a 20% increase in the money supply and we get a 20% approximately in prices. So prices shoot up in the US. Well, look, they inflated. How did the classical gold status stop them from inflating? 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 new money gets at the circulation. If you just look at the top series of arrows. So the money supply in the US goes up, but prices in the US pay for prices go up above world prices. Suddenly, the US is a better market to sell to and a worse market to buy from. Because our prices are higher than world prices. So our exports go down, x for exports, our imports shoot up. We suddenly get a balance of payments deficit. Our balance of payments is less than zero. We've purchased more from abroad than 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 happened, the US gold stock would start to drop. That $2 billion would start to shrink. The central bank would now have a reserve ratio below its legally mandated ratio. Or if it wasn't legally mandated, below the ratio, they were comfortable holding. So 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 that the reserves of the bank are reduced. And the banks then had to call in some of their loans and liquidate some of their checking deposits. So the money supply would fall back towards its own level, balance of payments would then, because now, as prices fell, exports would pick up, imports would fall. We wouldn't buy as much from foreign countries because our prices now are relatively low. And gold would flow back in. So they could not continually inflate the money supply. Every time they did, there was this mechanism called a price-species flow mechanism. Species 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 you had a deficit with them. They didn't want your dollars. They only wanted the gold or the silver, the money. So the upshot of all this is that the growth of the money supply was strictly regulated by gold mining, basically, throughout the world. And so that bank notes and deposits increased in quantity, only to the extent that gold reserves increased. Because remember, with all those $30 billion, or $25 billion, in checking deposits, is ultimately, under the gold state, a claim on the central bank's $2 billion worth of gold. So they're very fearful that if people lost confidence that they could redeem their dollars, their paper notes, and their deposits for gold, then they would rush to the banks. And the banks, they could demand gold from the banks. And then the banks would have to use their reserves, their Federal Reserve notes, and then go to the Federal Reserve and ask 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 marvelous mechanism for keeping governments in check was destroyed in 1914 by the various belligerents within two weeks of World War I, the two weeks of the beginning of World War I, every government had gone off the gold standard. The US did not enter until 1917. But in 1917, when 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 effectively, we went off the gold standard, too, even though it was sort of nominal. The war ended. We went back to what we're going to talk more about the Bretton Wood system. 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 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, which were, 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 bullion standard, meaning that it would only convert pounds, British pounds, into gold and 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 US government tried to want a propaganda campaign to get people to use notes and checking deposits and so on. Then in 1931, Great Britain went off the gold standard because of the Depression. The US went off the gold standard in 1933. And then France, Switzerland, and a number of other European countries in the so-called Latin Union, they went off the gold standard 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 wanted to increase your exports. It's like the mercantilists counseled. You wanted to increase your exports so that they would bring money in and expand your industry and increase employment. 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 up enough paper to push the price of gold from $20 an ounce to $35 an ounce. So the price of gold rose. But when it went out and bought this gold, what happened was that they used new money to do that. That new money got into circulation and pushed prices up. Needless to say, that policy of devaluation, that policy of trying to keep your neighbors' imports out and to sell your exports caused a downward spiral of international trade and investment. It almost completely stopped in the 1930s, causing all countries to become even poorer. The Allies, when they realized they were going to win the war with 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 the 1930s and during World War II. So they all met at a huge hotel resort in Bretton Woods, New Hampshire, and that was 1944. John Maynard Keynes represented the British Treasury. And these were the two big players, Britain and the US. And Harry Dexter White represented the US Treasury. Harry Dexter White was later found to be a communist spy. For what it's worth. And they both had these grandiose plans. Keynes wanted something called bankor, which is bank gold, a war for gold. He wanted some kind of a world currency to back up the national currencies that could be. So if somebody had a deficit, they didn't have to contract their money supply, as you would have under the old classical gold standard. You could run deficits, but this world organization would print up the bankor and you could pay your debts with a bankor. And the same thing, Harry Dexter White had a suitably commie name for his proposed unit. It was called the 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' system, though it had elements of it. It wasn't the US Treasury's initial proposal, though it had elements of that. It basically was 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 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. And guess which currency that was? Who was the overwhelming victor in World War II? The United States. So it would be the US dollar. And it would be redeemable in gold at the rate of $35 an ounce, which was the devalued price of gold. But that's OK, 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 is worth less than it was before. So that was reasonable. What was not reasonable is that the currency of all other nations were not directly convertible into gold, but had fixed exchange rates in terms of the dollar. So there was a dollar price of all the other currencies, the pound, the franc, the deutschmark, and so on. And even crazier, the US dollar was only convertible into gold for foreign central banks and government institutions. 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 had licenses as dentists or jewelers. And then they could purchase gold because they needed it in their trade. You couldn't even own gold in a foreign country. An American who had a gold store somewhere in Canada in a bank or whatever in Canada was in violation of the law. That law was finally repealed in 1976. So the non-key currencies, which is all the other currencies, but the dollar, were backed by dollars, not by gold. 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 US 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 the USSR and so on. So a lot of gold accumulated in the US. And here is a picture of the Bretton Woods system. So I should have put this. This is a US gold stock. And I think the reserve requirement was that they had to be 40% backing federal reserve, not since deposits by gold. And then there was a commercial bank deposit. And that was lowered over time. Then the commercial bank deposits in the US, the checking accounts, were backed by the federal reserve notes and deposits. And then the foreign currency and commercial bank deposits, foreign bank deposits, they weren't backed by gold. 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 stock of gold, which, as I said, wasn't such a bad thing in the beginning. Because in 1950, we had $25 billion worth of gold in our stock. Foreign liabilities, that is, the dollar liabilities that foreign governments and so on had, were about half of that. So there was like 200% 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. 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 in that way, as we'll see, generated a worldwide inflation. So the system really didn't kick in until 1958 when we had full convertibility. 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 the balance of payments deficit have any adverse effect on the US government? No. Okay. The reason is that if other countries are willing to accept the dollars, then if you run a balance of payments deficit, that means you can import a lot of goods. A lot of 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, so you get more goods, it's keeping the inflation right down in your country, and you're exporting inflation. So we're exporting inflation in exchange for real goods. This is how the US paid for the simultaneous war on poverty and Vietnam War. The Europeans, President Johnson at the time said, we can have both guns and butter, okay, sexist accent. So guns meaning, you know, fight the war, butter meaning consumer goods. So consumer goods didn't have to tighten their belts in the 1960s. In fact, we were quite well off in the 1960s. Why? Because Europeans were providing us with their goods and getting our money. The French economist Jacques Rueff, who was a friend of Charles de Gaulle, a close advisor to Charles de Gaulle, who was the French president at the time, started saying, you know what, this has got to break down because the US 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 gold 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? The Bank of England would then turn in some of the pounds because they wanted 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 demand in that gold stock of about six times the amount that we had. It was at this point during this time, I showed the gold under the advice of Jacques Rouef, demanded our gold back. And Germany also demanded gold that their dollar holdings be converted into gold. Of course, we weren't able to do that. Well, Germany was still an occupied country in effect. There was US troops all over Germany. So we basically blackmailed them. We threatened to remove our nuclear shield if they persisted in getting, trying to get their property back. So they backed off. The French, God bless them, sent warships to pick up their gold. They didn't knuckle under. 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 sent these warships to make sure the gold would be secure because you can't trust the Americans. If they sent commercial ships, they might have an accident at sea. So that was their thinking. And so they got their gold. In 1968, the run-on gold was so great in these markets. And let me tell you why there was a run-on gold. By then, the dollar was way overvalued, meaning prices began to rise in the US, too. So they're very, very high. If you could somehow get gold for 35, if you could somehow sell gold, get 35 dollars, oh, I'm sorry, take your 35 dollars, get gold from the official means, and then take the gold and sell it on these free markets, you could wind up getting $40 for the gold. And then what you could do is you made a $5 profit. You went in with 35, you bought the gold, you sold the 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 or keep it at $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 at $35 an ounce. They wouldn't even intervene in the private markets. That didn't matter what would happen. They were just gonna ignore it. But that was not a satisfactory solution. So some people say that the Bretton Wood system broke down then, but it's still formally in place that contract to convert gold into dollars for foreign banks, the foreign central banks and government institutions on demand. By 1971, there was a huge run on, I mean, the gold price was really shooting up. So the US government was again pouring gold in, trying to keep the price down. And we were losing gold, going down $9 billion, but we were losing at such a rate that we would have lost the whole $9 billion in two or three weeks. At that point, President Nixon closed the gold window. He went on national television in August 71. And at the same time, they had to announce price controls. I believe it was the same time. He announced the closing of the gold window. So that was the end of the gold standard. And then we see from 1971 on, I showed you the figures. What happened? This is what happened to prices. I mean, even though it was kind of a 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, the gold would be demanded in exchange for the dollars. But again, so prices from 1971 through, 2007 rose a third bullet point, a quintuple and rose by 600%, okay? 400%, excuse me, five times higher, okay? And most of that, much of that happened in the 1970s. And then when we had a big double dip recession from 1980 to 1982. So, I meant to point out, Jacques Bouef had a phrase that caught on and that was that the gold exchange standard allowed the United States to run a deficit without tiers. Meaning that as long as foreign countries would accept our paper dollars and send us real goods, that there was absolutely no adverse consequences to expanding the money supply. So then what happened after that, in 1973, they tried to reestablish, or actually right after, yeah, I think it was maybe 1972, 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 months after that. So now there was sort of dirty floating. And if I go back and show you that period of dirty floating, no one was really satisfied with. So we had dirty floating from 1973 to 1980, meaning all governments tried 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 gonna respond? How are the other countries gonna respond by doing the same thing? So you began to get competitive devaluations. Everybody trying to sell more exports by making their currencies cheaper. And that clearly didn't work. So we moved on in the 1980s. They tried to have central bank cooperation in the 80s. And that worked somewhat. The U.S., from 1981 to 1984, the U.S. currency was very, very strong. And that's when the U.S. auto industry became very, very uncompetitive. Not only were U.S. autos not very competitive, sort of, or not as good as a lot of foreign auto makers, their products, but also the value of the dollar had gone up quite a bit. So it was very expensive to buy U.S. automobile, to export U.S. automobile. So at that point, the U.S. auto manufacturers and the unions and others began to pressure the Reagan administration, pressure their congressmen 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 printed a lot more dollars and the value of our dollar went down in terms of the German mark and the Japanese yen. So we sold more goods abroad. And we bought fewer of their exports because who's hurt 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 good or to purchase a mark. Okay, so it caused a decline in U.S. standards of living. So finally, prior to that, the monetarists who were very influential in the early Reagan administration, okay, they believed that freely floating exchange rates where you have the free market setting, the rates of these 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, its prices went up by 20%, well then the value of its currency would go down by 20%, and there wouldn't be any advantage, okay. So there would be no balance of payments, deficits, or surpluses. The market would automatically establish the foreign exchanges at levels in which it didn't matter whether you bought from one country or another, given the same good. Okay, so that was the monstrous dream. And they said that they wanted no government interference. They said this was called no balance of payments crises. They had a few other things they said there would be no instability of the price level. Because if you didn't import or export gold, when gold came into your country, you had inflation. When gold left your country, you had deflation. Or under the Bretton Woods system, 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 you had inflation, then it was all your own fault. Okay, inflation could no longer be imported or exported. Okay, under the system of freely flowing 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 the monopoly. Now what incentive is there to pursue 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 using the by government bonds? There wasn't any incentive any longer. Okay, even under the Bretton Woods system, at least there was a possibility that you would lose gold or if you were in 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 back in, when we got to 1985 to 1987, there was all this pressure from special interest groups to drive the rate down. So freely fluctuating exchange rates only led to for a few years. There's always pressure to get the government involved to help the export industries. And that's exactly what happens. So the mantra's dream turned into a nightmarish reality. So they gave political institutions complete control of the money supply, no constraint by gold. There was tremendous fiscal irresponsibility. All governments like to spend because that gets them votes, but they don't like to raise taxes because then the people who don't get the government or jets who are not the benefits of the government spending, they find their prices going up and they get less and less because of inflation or rather because it's taken out of their pockets with taxes and it's obvious whether taxes are being or redistributing income. But now that's not true of inflation. It takes a while for the public to catch on. So you got fiscal irresponsibility because you could hide it behind the veil of printing money. And say, look, this is great. Everybody's going back to work and so on and so forth. But during the inflation, people who were not getting that new money first from the government, people who were 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 were very powerful. So they made the currency cheaper and that did initially, prices 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 more goods will be sold abroad and consumers, because the dollar is cheaper, will not be able to buy as many imports. So consumers, the standards of living will be hurt and more hurt during the 80s. And on the other hand, you had all these benefits surreptitiously secretly being bestowed on the export industries. So now let me just talk about some prospective monetary systems that others have put forth, Keynesians, mainly. When all this stuff was happening, the Keynesians began to say, they began sort of in the late 80s, early 90s to say, fixed exchange rates are better. They are better, but not with gold. Gold is terrible. What we want basically is a movement towards either these big central banks cooperating with one another and fixing, arbitrarily fixing the exchange rates, or one economists will see even proposed a one-world money. So this all happened during the 1980s and 1990s. 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 while your currency was decreasing. So there could be a run from the US dollar, which would cause the government to say, wait a minute, the value of our dollar is really falling. Everybody's dumping dollars. And they didn't want that to happen. So that was the one merit of fluctuating exchange rates. However, if you get central bank cooperation, then as the Keynesians wanted, then you could all inflate at the same rate. And even worse, then there's no where to go. Every currency is being depreciated at the same rate. Or even worse, if you create these fiat reserves to back up some kind of world money, sort of like the EU to back up the euro, or the euro is sort of the one monetary area currency. Then there's no escape from inflation, which all governments, as I pointed out, are prone to. 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. It was put forward by an IMF bureaucrat named John Williamson and a former Carter Treasury bureaucrat named C. Fred Bergston. Never trust people who just have the C instead of the full first name there. 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? Well, the bureaucrats would determine what they are, 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 literally, they'd make an exception for them. They would have a Crawling Target Zone with soft buffers. So, 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 you would be allowed to keep your exchange rates within a zone, 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 since the 90s, by less developed countries. They tend to use these, they're now called Crawling Pegs, where you adjust the peg every month. You peg to some stronger currency, but you recognize that you're going to inflate. Think about that. Basically, you wanna inflate, so you're gonna inflate by pretending you're not inflating, by having this Crawling Peg. So you would reduce the value of your currency one percent every month or so, okay. So, under these Crawling Target Zones, all the big governments would get together and they would agree to a targeted growth of total domestic spending, okay. So, everybody would try to fix their domestic spending. They 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 McKinnon, who actually is a good economist from Stanford, he came out up with a proposal for a gold standard without gold. That's what he called it, 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 yen, and the dollar, within a narrow band, okay, they'd be fixed to one another. 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. So they would use these short-term interest rates that the Fed uses. 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 N. Cooper, and you can't expect much more than this from a Yale economist, proposed a world fiat currency in exchange for government securities. So in other words, this is the old Keynes plan, everybody, if governments wanted to get their secure, to increase money supplies, they would have to sell their bonds to this world authority, which would issue this sort of world reserves, really. And then, based on those reserves, you could then increase your money supply, okay? And then you'd be able to finance your budget deficits. Well, in some sense, the euro was a version of this. It's definitely a version of this. So even these crazy ideas, I mean, when they're stated, most people didn't accept these ideas when they were first stated in the late 80s or late 90s, but they just worked their way into the academic literature and finally to the policy makers and then this is what happens, okay? It's just the way that 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 sovereign default. It didn't bring even more order into the inflation process. Even in the euro zone, there's inflation at different rates and so on. So the bottom line is that we're just gonna 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 made the point of either, and somebody from the World Bank also, and I forget his name, made the point that maybe we should look at going to some sort of a gold standard or commodity standard, okay? Getting rid of the dollar as the, it's not the key currency any longer, but it's the reserve currency of the world. People still, most governments still hold the dollar in large quantities, right? So bottom line is there is a silver lining to the dark clouds that I've been painting here and that is that I think we're gonna see a movement back towards people at least taking a look at commodity money again, okay? Back towards the best and away 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 wanna be duped like the Europeans were during the Bretton Woods system might lead the way. Okay, I'll stop here and take questions. 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 they talk about austerity, what they mean is an increase in taxes on the backs of the productive in those countries and sort of minor cuts in government spending. There are some market oriented economists working at the IMF who are trying to reestablish markets, but I don't think you establish it by an outside bureaucracy issuing edicts in exchange, in other words, they're bribing these countries to do certain things that are gonna hurt parts of their populace. And rightly or wrongly, that's gonna be perceived as outside interference and that's gonna, people are gonna resent it and people are calling it market reforms or, you know, austerity policies. But in the right, the Austrians have, are in favor of austerity policies in the right sense. That is you cut government spending and you cut taxes, okay? So that you have a less destruction of resources by government. So I don't think they should be listened to and I don't think that their loans should be taken by these countries. I think they should just simply default on their loans on the sovereign debt. 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 the debt set incurred by dictators we don't like, call them the corrosive debt. But by dictators and parties that we like in various countries, well, you have to pay those back. And those are usually the countries that US banks, 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, then thank you.