classical economics
for analysis,  forecasting
and policy design

Gold Standard v Keynes

GOLD STANDARD VS KEYNES
Which Is Economically Illiterate?
By Wayne Jett © July 10, 2019


     Eureka! Today we find a rare opportunity to confront the misled acolytes of John Maynard Keynes, who, sometimes unknowingly, attempt to advance the cause of global mercantilism by denigrating the principles of classical economics. President Donald Trump recently nominated Dr. Judy Shelton to become a governor on the board of the Federal Reserve - a selection previously recommended here - but she is vehemently opposed by those who control the U. S. outpost of mercantilism known as the Federal Reserve System.

     Shelton is opposed by the mercantilists because she is an exponent of sound money, meaning currency which maintains stable value over time. She maintains that stable value in currency is best achieved by using a “gold standard” methodology to manage the currency system. For this offense, Shelton has already been called "macro-economically illiterate" by a University of Chicago defender of the mercantilist Fed. Let’s examine whether economic illiteracy best describes classical economic theory or Keynesianism.

Keynesian Economics: Mercantilist Tool

     Keynesian economic theory pretends to aim for benefits to common people of the middle class, but uses the same assumptions and economic constructs previously espoused by globalist kingmakers to achieve mercantilist objectives. This assessment is essentially the same as was made by Eli F. Heckscher within a dozen years after Keynes published The General Theory of Employment, Interest and Money in 1936. Heckscher was the Swedish author of a two-volume treatise published in 1931 (translated into English in 1935), which has been regarded in academia as the international authority on mercantilism since that time.

     Keynesian economists on the Fed’s board of governors and on its staff enable the Fed to operate as a black box. The Fed does as it wishes, discloses only what it chooses, and explains only as necessary to appease political constituents. Each of the 12 Federal Reserve Banks in the Fed apparatus is a private corporation whose shares of stock are owned by the privately owned banks and by financial interests which own the banks in the twelve designated regions of the U. S.

     The Federal Reserve Bank of New York dwarfs all other regional Fed banks, both in size and influence, conducting all “open market operations” for the Fed system. These open market operations greatly influence financial conditions in the U. S. and globally, and are routinely rubber-stamped by the Federal Open Market Committee (FOMC) without public disclosure of their details.

The Federal Reserve System

     All banking activities of the Fed are conducted by privately owned banking corporations, organized under corporate charters authorized by federal statutes – much as each state authorizes private corporations to be formed under state laws. In some instances, the Fed calls itself “the central bank of the United States,” without details of private ownership. 
 
     However, the Fed describes the Federal Reserve System as comprised of the seven-member Board of Governors (“a central, independent government agency”) plus the 12 Regional Banks, each of which is privately owned and operated.  Importantly, all monetary policy-making authority rests with the FOMC, which is comprised of the seven governors, plus the president of the New York Fed (who always serves as FOMC Vice Chairman), plus four presidents chosen from among the eleven other Fed regional banks.

     With these details on the table, the tremendous leverage over U. S. financial and monetary policies wielded by the big Wall Street banks – J. P. Morgan Chase, Goldman Sachs, Morgan Stanley, Citibank – becomes more readily apparent. These and other banking firms called "Too Big To Fail" (and furnished billions of dollars) during the 2008 financial crisis own and control the New York Fed. Anyone who has dealt with these firms (or with their lawyers) knows they are neither guided nor motivated in their business actions by objectives of public service or social responsibility.

     Those who understand the 2002 federal criminal indictment of Arthur Anderson, the most respected independent accounting firm in America at the time, for an alleged crime not created by any federal statute know also that J. P. Morgan Chase and Morgan Stanley were more deeply involved in Enron's activities than was Arthur Anderson. Yet both Chase and MS were dealt with discreetly by imposing civil fines. Later, Goldman Sachs and MS stepped into the business void vacated by the destroyed Enron. These events illustrate both the motives and the power of the TBTF Wall Street banks and their owners. They own control of the Federal Reserve Bank of New York and effectively control the FOMC.

                                                                     The Federal Open Market Committee

     In this context, let’s focus now on FOMC monetary policy making since the Fed was “reformed” in 1935. Its first acts in August, 1936, and in January, 1937, were to increase the mandated amounts of bank reserves by 50% and then by an additional 33% - thereby cutting lending capacity of banks in half. These callous actions by the FOMC caused many loans on farms, small businesses and homes to be foreclosed, even if performing, and many small bank failures when the banks were not otherwise seriously troubled.

     Also during 1936-1937, the Fed chairman Marriner Eccles cooperated with President Franklin Roosevelt’s demand that $7 billion in gold inflows to the U. S. Treasury from Europe should not be monetized as required by the gold standard rules previously in effect. At the time, Eccles was fully aware: (1) that FDR’s government was purchasing thousands of metric tons of gold with dollars taken from the U. S. economy as federal taxes or by selling Treasury bonds, and (2) that none of this purchased gold was permitted to be monetized.

     These actions and others by the FOMC and by FDR produced severe deflation and the “Roosevelt Depression” during FDR’s second term as U. S. president, causing death by starvation of millions of Americans. Yet neither the Fed, nor the FOMC, nor the Treasury Department acted even to announce the concern, much less to alleviate or to end the directly deflationary actions.

                                         Destruction of the Gold Standard International Monetary System

     Such tragic, inhumane outcomes were not produced by gold standard rules of monetary policy, but rather by extreme violation and abuse of gold standard rules. The international gold standard monetary system was effectively destroyed by Roosevelt’s intentional, deliberate actions. Other nations which sold gold in order to feed their citizens during the Great Depression could not return to the gold standard in later years due to their lack of gold.

     Americans' right to exchange paper currency for gold at a guaranteed price were taken from them by presidential edict within the first month FDR was president in 1933. This action destroyed an essential mechanism of true gold standard money at that time. Then, after January 31, 1934, other central banks of the world were guaranteed the right to exchange dollars for gold at the price of $35/oz, but the previously held rights of Americans were not returned to them.

     In these conditions, the FOMC gradually inflated the dollar while still selling gold to foreign banks at $35/oz until August 15, 1971. That was the date when President Richard Nixon (with formerly Chase Manhattan’s Paul Volcker advising) “closed the gold window,” and the market price of gold promptly quadrupled ($140/oz.) within 18 months. This turn of events was surely known in advance by the international banks which purchased gold from the U. S. Treasury during the previous 25 years.

     After this brief review of Fed/FOMC monetary policy and practices – all conducted under the auspices of mercantilist (i.e., Keynesian) theories and practices – are reasonable observers expected to assume that 1971 was the time at which socially beneficial motives and practices would kick-in at the Keynesian-dominated FOMC meetings? Of course, any such expectation, suggestion or hope borders on utter foolishness. Yet mainstream media, aka “fake news,” still gives complete support and protection to each policy and practice the Fed/FOMC proposes or reveals. This attitude and outlook was evidenced in the recent "mainstream" television news report (first linked above) of Dr. Shelton's nomination to the Fed board of governors.

                                                                    FOMC's "Mainstream" Monetary Policy

     Before proceeding to consider the "mainstream" opposition to classical economic principles, first we should consider briefly how the FOMC has claimed to manage monetary policy since 1971. Ignoring the serious harm done to economic productivity by instability in currency value, the FOMC has permitted the dollar's value to float - mostly decreasing in value (inflation), but on two important occasions exhibiting severe deflation.

       In conducting its monetary policy, FOMC has claimed to use as its "primary tool" the interest rate paid by member banks for borrowing funds overnight from the Fed. Use of this Fed Funds Rate "tool" has meant setting that interest rate by vote of the FOMC.

      The great policy flaw in the FOMC's choice of the Fed interest rate on loans of overnight funds as its primary policy tool is this: the FOMC has no mathematical formula indicating that the Fed funds rate has a controlling relationship with the value of the dollar, or with the number of dollars in the monetary base, or with the number of dollars in the economy. So why then does the FOMC set the overnight Fed funds rate by their vote? One motive may be to provide a benchmark rate which all Wall Street banks  may use to set their lending rates, seemingly without violating antitrust rules.

      Regardless of the specific motive of the FOMC in selecting the overnight funds rate as its principal policy tool, the funds rate is infamously ineffective in achieving stability in the dollar's purchasing value. Since 1971, the currency issued by the Fed has lost about 97.5% of its purchasing power relative to the stable value of gold. During the same period, the FOMC has produced three extended periods of severe collapse in economic growth resulting from the FOMC's deflationary actions purportedly taken to reduce or "break the back of" inflation.

      One additional FOMC "mainstream" policy must be mentioned before moving on to examine competing classical views. The FOMC "fights inflation" produced by its own "floating dollar value" policy by using the outrageously mercantilist "Phillips Curve" analysis. The Phillips Curve reveals, completely unsurprisingly, that prices of goods and services will not rise as fast if a sufficient number of presently employed workers become unemployed so they have no money to spend.

     Based upon this completely anti-social - if not downright evil - notion, the FOMC proceeded in 2007-2008 with monetary policies intended to cause the lay-off and termination of hundreds of thousands of previously employed American workers. The FOMC succeeded in its intent, giving rise to eventual defaults in mortgage payments and setting up the subprime mortgage industry for destruction at the hands of Wall Street's short-side hedge funds.

     Anyone still unwilling to acknowledge that the FOMC's use of the hateful reasoning contained in Phillips Curve theory as a central tool of U. S. monetary policy is based purely in mercantilist animosity towards the middle class must themselves be mercantilist to the core.

                                                                                                  Classical Monetary Theory and Practice

      The first principle of classical monetary theory is that the monetary unit should remain stable in value over time. Experience has shown that gold exhibits stable value more reliably than any other substance known presently. This is due primarily to the very stable chemical structure of gold and its common uses. Gold also has the desirable characteristic of relatively high value per unit of weight and size, so considerable value can be possessed, handled and transferred with minimal physical difficulty.

     With this basic nature, gold becomes a very beneficial tool of monetary policy, because any change in the price of gold in a particular currency indicates changed conditions in that currency - not in the gold. Acknowledgement of this rule by the manager of the currency involved enables corrective actions to be diagnosed and taken.

      The value of currency exchangeable for gold of a guaranteed quality and price is highly desirable both domestically and in international trade. That is why world trade and the middle class grew strongly during the 18th and 19th Centuries - the years when the gold standard was most prevalent in international trade as well as domestically in America and in other countries. The international gold standard in effect in 1850 was surely a very significant component of worldwide economic progress and growth by the middle class when, at that time, Karl Marx credited capitalism for greater improvement in human conditions in 150 years than had been achieved in all previous human history combined.

      The beauty of the gold standard for currency was (and is!) the relative ease with which money supply can be managed to achieve stable currency value. The monetary authority for each nation sets the purchasing power of its currency relative to gold at the price which best reflects prices of other goods and services in its economy. Then the monetary authority monitors the market price of gold in its currency. If the market price of gold rises above the target price, the monetary authority acts to reduce the supply of currency until the target price prevails. If the price of gold declines below target, the monetary authority adds currency to the economy until the gold price rises to the target price.

      One additional point is highly relevant to America's present plight in having a monstrously high current account deficit. The U. S. economy annually buys $850 billion more goods and services from abroad than it sells abroad. This results from trade agreements which do not prevent manipulation of currency values, either by the monetary authorities themselves or by other players in the foreign exchange markets. Currency manipulation is easy to do and difficult to detect or prevent when all currency values are floating.

     Intentional currency devaluation cheats on terms of trade, but leads to inflationary races to the bottom by all fiat currencies. An international gold standard for currencies would maintain currency values and restore fair trade among nations.

      Where is the "irrationality" or the "macroeconomic illiteracy" in such direct and clear policy and practice?

                                                                                                        Unrelenting Power of Mercantilism

      "Mainstream" major media in the U. S. denigrate Dr. Judy Shelton's capabilities to assist much needed improvement of U. S. monetary policy because she professes appreciation of classical economic theory involving the previously very successful international gold standard. Major media in America are as much the controlled operatives of the sponsors of mercantilism as are the Federal Reserve and the Federal Open Market Committee. Neither the MSM, nor the Fed, nor the FOMC serves the public interest. Each of them serves mercantilist masters. A turn away from mercantilism towards capitalism is much needed and long overdue.