The Inflationary Boom of the 1920s

0:00The whole concept of business cycles, well first of all, before the mid-18th century, there weren't no such things as a business cycle, except maybe in Italian cities or something like that, but in a very localized scale. But basically what you had, William Scott I think wrote a book some years ago, some decades ago, about business annals, about going through all the annals of business and seeing what happened from year to year, prosperity and depression kind of situation. The King will decide the king needs money, the king decides to nationalize, confiscate all the money of the goldsmiths, this causes headaches, or a war begins and all trade is cut off, or something like that.

0:58The Civil War begins, the English cotton textile industry, The cotton textile industry, which was dependent on American cotton, suddenly gets cut off from supply. Obviously, there's a big depression in the English cotton textile industry. They later turn to other sources. But the point is, for a while, they're kind of caught short. So it's obvious why these things happen and how they create problems.

1:45But there's never any idea, really, of some kind of a boom-bust which follows each other in any kind of regular pattern. and which can't be where there's no evident cause but you can't say okay this is a tool of bubble or this is something else something is happening which is not self-evident to the average observer this begins to happen in the mid-eighteenth century, especially in Britain in the most industrialized countries in the most developed countries and you get a sort of boom-bop pattern something like that and from then on economists and other observers trying to understand why is this happening? Why is this new development? The development is not very welcome, especially the bust part. Everybody loves the boom part.

2:32Nobody is really worried about the boomer, but everybody is really concerned when suddenly a bust, and particularly the crisis or the panic. Banks fail and every bankruptcy has occurred, and things are falling and you don't know what's going on. A sudden crisis or a sudden panic. so that the older historian, for example, would refer only to the panic of 1837 or whatever and not any kind of business cycle, really interested in this panic problem well, what happens is, two things really happen, two big things, big, big things happen in the mid-18th century, and they happen together, and they happen around the same time this confuses the economists who are trying to analyze the cause Two big things are the Industrial Revolution and the development of the modern banking system.

3:20What happens is you have a general split of two kinds of business cycle theories which then develop ever since. One of which settles the cause of something that happens deep within the industrial system, some malfunction which is inherent in industrialism or capitalism or whatever. And the other group pinpoints the cause of something in the banking system that screws up the situation. And obviously, if it's the banking system, then it's a much easier thing to cure, because then you sort of clobber the banks to somewhere in the other, it's a much simpler thing to get at. If it's something that's deep within the industrial system or the capital system, then you've got a lot of troubles in your hand, then you can get people like Marx who say, you have to scrap the whole business and go over socialism. So you have these two competing tendencies among economists from then on, and the interesting thing is, well what happens, the 20th century economics, before the Freemannites came in

4:16a big number, basically not only did the industrial side went out, the audio industry of the cause went out, but the people who claimed that banks are really the cause were confused with being simplistic. The Theory is a big thing because it's too simple. You have that really complicated, to be respectable, you have that very complicated analysis of what's going on. So the accusation of being simplistic stuck very, you know, hit very deep. Managed to squelch a lot of the monetary kind of argument. Another thing is this, this is a very peculiar thing in the history of economic thought. What happens is, the founders of modern scientific economics, if you want to put it that way, David Ricardo and his group really had a monetary explanation of the business cycle.

5:02But if you look at historic histories of economic thought, you never find this. It just disappeared. It's been plunked down the memory hole. What happens is, everybody says, yeah, Ricardo had a, and David Hume before him, had a theory of international trade. The theory of international trade essentially goes something like this. International Trade and the price level, the so-called gold specie flow mechanism. Let's say you have a bunch of countries, England, France, Germany, whatever. England inflates the money supply. The banks inflate the money supply to the aegis of government, which is almost always the case. Banks increase the money supply. As the money supply goes up in England, prices go up because of the direct relationship between money and price level.

5:53So, prices are dragged up along with it. As English prices go up, certain things happen. Now we find, for one thing, English prices are now no more competitive with French and German prices. They're competing for world markets. English prices are too high. So, this means that the French cut down their imports from England. So, English exports and while this is going on, the English prices are too high, Englishmen now fuel with more money, they think they have more money from the banks, and also looking around and finding out that other prices are cheaper, buy more from France and Germany and the United States and whatever, so imports go up.

6:40So the direct result of this inflationary situation in England, with money supply going Bank money going up, prices going up, we have exports falling, imports going up, so-called deficit and the balance of payments. How are you going to pay for the deficit? There's only one way to pay for the deficit. In those good old days, there was no such thing as gold exchange standards, no monkey around foreign currency reserves. You'd pay for it with gold, because the French and the Germans are not going to take anything except gold. They're not interested in sitting on a hoard of pounds. It's only now, in a more sophisticated age, when these tomfool Germans, Japanese, etc.,

7:45In this kind of situation, here's the bank. The banks are, let's say, 10 to 1, or 5 to 1, or whatever the ratio is, have notes in deposits on top of gold. They're expanding their notes in deposits, so they're increasing the top part of the pyramid, and as a result of that, they're losing gold, so the bottom part keeps dropping. So they're getting more and more top-heavy, and as they get more and more top-heavy, they get more and more scared. You're getting into a situation where the increasing demand by the French and the German sector for redemption in gold, and even the Englishmen start getting a little nervous, because here you are, you're a bank depositor, you're a bank note holder, you look at the balance sheet and you find out that the supply of gold is getting less and less proportionately to those in the deposit, you start cashing in, I don't know, why should I wait until the crisis, let's start cashing in now,

8:27this is a great concept of the bank run, by the way, a noble bank run, where you begin to realize down deep in your heart that the bank is really bankrupt, They haven't got the money that they say they've got, and you really sort of thought they had, but you really knew down the deep they don't have them. You start, I'm going to be the first, I'm not going to wait, you know, full cash-in, and your friends do it, and your relatives do it, and then the reason the panic is on. So all these things are pressuring in on the banking of the English banks, let's say. And finally the crisis occurred, the English banks are forced to contract that credit, they have to stop it, there's bank runs, there's guys cornering it from abroad and internally. And then you've got the contraction of the money supply, and as the money supply contracts, you have bankruptcies and panics, you have calling in loans that everybody's in very bad shape for a while, it's a crisis.

9:13And then prices fall, and there's other form of money supply, and as the prices fall, we're going to have a reversal of the deficit of the balance of payments. We kind of have a situation as English goods are getting cheaper now, English exports go up and English imports go down. Now there's not as much incentive to buy from abroad. Anyway, people haven't got the money to buy from abroad as they did before. So now there's a surplus in the balance of payment. The money flows back in and we have a double regulatory mechanism here, so to speak. We have, on the one hand, a self-regulatory feedback, so to speak, in balance of payments, limiting the deficits.

9:59Now we have a permanent deficit. We have a deficit of at least 23 years. We'll continue to have it. On the other day, you have in the gold standard mechanism, you have this limiting situation. You have a limit on inflation, and you have a limit on deficit and balance of payments. You have this regulatory kind of device. It's also a device that keeps price levels more or less proportionally throughout the world trading area. So no one country gets out of line with other countries' prices. It's a beautiful system. However, it works less well the more banking inflation you have and mucks things up, and the more the regulatory mechanism gets slowed down by government action. So anyway, this is what every textbook talks about, this Ricardian, human Ricardo species from mechanism. What they don't talk about is, At the same time, the human Ricardo Adam Breit Theory of Species Flow Price Level, they also have a theory of business cycle.

10:52It's a fairly simple theory, but it's a pretty damn good one. The theory is, the banks inflate money and credit, prices go up, you have a boom, everybody's feeling good, they spend more, etc., etc. And then, finally, the banks have to contract credit, then you have prices collapsing, etc. This is a one-stage, two-phase business cycle. One unit, two-phase business cycle. Let's say this explains one unit. Why does it keep on going like this? It's not strictly periodic. It's sort of a regular kind of pattern. The reason is, as part of the theory, banks always want to explain. They always want to expand money and credit. They haven't been able to get away with it here because everything is sort of zeroed in on them.

11:38What happens is, after a couple of years of shaking out, everybody's sort of forgotten about this. The banks are back in a soft-to-sound, liquid condition. When they can start the process up again, the whole thing begins once more. So, and this is, of course, added to this, is the tendency of the government to inflate, for reasons I think I mentioned before. The government always wants to have more money, either to pay for its own expenses or to subsidize favored groups. And the best way to get it is to have the banks inflate the money supply. So, this is the Ricardian model. This is the first big monetary theory of the business cycle, emphasizing money in the banks as the major cause. Obviously, I can't prove any of this in these lectures here. I have to refer you to my other writings, and I recommend it.

12:23But the point is, this is sort of the basic model. They had a big fight in the, interestingly enough, in the early 19th century, the United States, everybody thinks of American economic thought as being very backward compared to English. In the United States, they had one shrewd realization, I think Professor Goldberg was mentioning that notes and deposits are really the same. The English economists, even though they're much more intelligent, much more high-type than the American economists, never really realized until it was too late that bank notes and demand deposits, checking accounts, are the same thing. They concentrate on the banknotes, and refuse to demand deposits or something else that are legitimate. They're not following the money supply, and they got the whole thing fouled up as a result. When the Ricardians, who were called a currency school, passed the Nobel Appeals Act of 1844, they decided to smash the business cycle once and for all by requiring 100% gold back to Any future inflation of banknotes, you allow this 10 to 1 to keep on for purposes of easing

13:27the transition period. You say any further increase in notes and deposits has to be backed by the same amount of gold. To impose a non-inflationary forever more on the English banking system, they left out of the deposits because they didn't take deposits upon the money supply and what happened then is the banks start another inflation based purely on checking accounts and this discredits I didn't understand it when you threw it in the air, but I'm going to make sure I understand how to find the cost of the demand, if I have to mean what somebody would call a check.

14:19Let me make this a very simple kind of thing. Again, this is a point where all economists agree on this particular point I've mentioned, but many people here might not know it. Let's suppose there's only one bank in the country, even one bank in the entire world. This eliminates the world's deficit of balance of payments. There's now one world government, let's assume, and there's one world bank, the Bank of the World. There's a compulsory monopoly of the banking system and no competition against the Bank of the World. The bank of the world, supposing there is a reserve requirement, how does the money get created? It gets created very simply. Supposing there is gold for some reason still in an anachronism, say one billion, when you ask that column. Let's say you start with 100% reserves, make it very simple, and here you have demand deposits and notes.

15:13Let's say the man deposits from that. Let's assume here another model, everybody, the way they got the gold is by everybody depositing a billion dollars worth of gold. Everybody gets a checking account matching it. So you have one billion on one side and one billion on the other. Listen to Sally, the original Bank of Hamburg and Bank of Amsterdam were 100% gold banks. It's just like warehouses. You deposit the gold, you get a warehouse receipt, then you have 10 ounces of gold there, you can pick it up anytime you want, then you trade the 10 ounce The Bank of the World starts going on its true purpose, which is to inflate the fairly What it does is, it lends five billion dollars to general dynamics for good and useful purposes.

16:12What it does is, how does it get the five billion? It gets it by creating out of thin air. The fundamental law of banking economics, again, I agree to part by all schools of thought and economics, is the banks do not simply borrow your money and re-lend it, they create it. They created it by simply writing it out on an account saying, okay, you're going to have a demand deposit of five billion, and General Dynamics takes the five billion and spends it on new factories and hiring workers, etc., etc. And what's studying this now is an IOU from General Dynamics of five billion. We now have an increase in the money supply from 1 billion to 6 billion, a six-fold increase, simply by magic, just writing out this account, opening up the account.

17:01Is there any clinker in this? There's only one clinker. I mean, what happens is, first we have a demand deposit, the General Motors, of 5 billion. Then General Motors spends it on all sorts of stuff, roads, paperclips, wages, workers, and the 5 billion gets diffused throughout the system. The Bank of the World is in great shape. The only possible problem is some of you guys might want to claim gold or cash or whatever it is for the man deposit. Then there might be some trouble. So if one of you has a billion dollars and you go to the bank for redemption, then the bank is in a little bit of trouble.

17:49Where can I get the money? And this is the only check on the bank of the world. Of course, the next step is to eliminate the gold standard and declare the bank of the world legal tender. The banking system doesn't have a bank of the world, you have thousands and thousands of banks in each country, in each bank a piece of the other, in each country a piece of the other, but if you can get all these banks to... so the only check, for example, on English banks, I was saying before, that the French banks call on them for redemption, plus the internal Englishmen, that's not very great. But if you can mobilize the whole system, like the Federal Reserve system mobilizes the whole country, if you can mobilize the whole system so that the banks don't really compete, so they're all getting reserves together and all induced to inflate together, then you don't have to worry about one bank cashing in another bank, because you'll have just as many people of the other bank trying to redeem from the first bank

18:43everybody's tati-tati, the clearinghouse, settled the whole business. You can keep inflating forever. So, the only problem comes with redemption. During the free banking period before the Civil War, it's often said that the wildcat banks expanded. I mentioned before the reason why the bank, as much inflation as there was, which wasn't really that great before the Civil War, is because every time the banks really got into trouble on a massive scale, the state or federal government said, okay, you don't have to pay anymore for a while. You don't have to pay in gold. This permits the inflation to continue. One amusing thing is that in 1819 and 1820, I think 1820, there's a correspondence between David Ricardo, the most eminent economist in the world, and Condé Ragé, who was an excellent economist on his own right from Philadelphia, who was a hard-money man.

19:34And Condé Ragé is trying to explain to Ricardo the American banking situation and is having a great deal of difficulty. And he's saying nobody's, it's trouble, everything's inflated and nobody's, you know, the banks are still, they're increasing the money supply and nobody can redeem any money in gold and so forth. Ricardo's writing back and says, what do you mean they can't redeem in gold? It's illegal. You can't, you can't, you can't, the banks can't insist on somebody paying them their debt and they're not paying their own debt. How can they get away with it? Why are they still in operation? Why haven't they all been closed up? This is nonsense. So Ragé writes back to him and says, look, Mr. Riccardo, you're a great economist, we love you and so forth, but you don't understand the American banking system. In the United States, everybody is either a bank director or a stockholder, or he owns money of the banks anyway, and they're always dealing business with the banks in some way.

20:22So if any outsider wanders into the situation, is not in one of these categories, and tries to redeem his money to the banks, he's immediately clobbered by everybody. The Appeals Act people at currency schools think that demand deposits are not really money, it's only bank notes. Bank notes is one form of warehouse receiving bank deposits or another. Connie Ragge and the American hard-money people, the American recordings, William Gouge and people like that, understood it. They understood the man deposits were part of the money supply, but they couldn't influence the recordings, because the recordings wouldn't pay any attention to American economists. Who are these clucks over there? Where are the big shots?

21:07So there was no influence of American economists on the English economists, even though there was, of course, the other way. So they were never able to get it through their skulls until it was too late and the whole jig was up. Well, the next step in this process, in the theoretical front, essentially made by Ludwig Salerno, founder of Swedish economics, and then by Ludwig von Mises, and the readings You add on to this model of money and prices going up and down as being the key is something else.

21:55Something else makes the business cycle much tougher in a sense of being more intractable once you get started. Something else is the process of inflating the money supply and inflating bank credit. You're not only raising prices, and that's bad enough, you're also doing something else which is in a sense even worse. You're messing up the whole production system. You're messing up the sort of things which business will invest in. You're distorting the whole production process and creating the necessity of a later recession to correct it. So now we begin to have a situation where, in this model, you sort of look at the, in a way you can look at the recession as unnecessary. If the government somehow stabilizes the whole thing and lines it up, you wouldn't have any problem. If you look at the boom as essentially not just a happy time before the recession, it's really the worst time because the boom is the time where you have the distortion of production.

22:45Then it's important to allow the recession at its head, allow the recession to iron out and correct these distortions as quickly as possible and get this thing over with and go back to the normal kind of pattern. The distortions for inflationary bank credit are essentially overinvestment in the capital goods industries, the so-called remote orders of production or the higher orders of production as the Austrians put it. In other words, things like dams, machine tools, construction, those things are most remote from consumer goods. And these are the things which get over-invested. In other words, there's an under-invest because of the fact that the banks are expanding inflating They're pushing the rate of interest below this free market rate. They're creating a situation where too much is invested in the higher orders of production, machine tools and more industrial materials, et cetera, and not enough in consumer goods.

23:35You have this distortion. And you have to keep doing this. You have to keep inflating, keep one step ahead of retribution, which is, of course, coming up and imposing what is now called a liquidity crisis in the industry, where you think you can borrow another 10 million, you can't do it, How are you going to pay for this extra cost? So, once this process stops, once this inflationary process stops then, these distortions are revealed. We find out the business is over-invested in all these projects and all these plants. And the whole thing has to be liquidated as quickly as possible to get workers and resources and equipment back to the consumer goods industry to start in a silent situation. That's in very brief terms the Austrian theory. What it does is, it imposes upon government, its policy conclusion is very simple.

24:22Its policy is even though the theory might be fairly complex. Its policy conclusion is, it says to the government, if you're inflating, stop it. If you're in a recession, don't do anything and let the thing iron out as quickly as possible. In other words, a very, very extreme laissez-faire policy in this area. In the 1920s, this is reflected, as we'll see next time, in the over-investment in capital good industries, particularly those areas which reflect the value of capital, the stock market and land, which are purely capital-oriented kind of things. Incidentally, this is the exact opposite sort of explanation as the usual popular explanation of the depression, or the Keynesian explanation of the depression.

25:08The usual explanation is, all of a sudden you're in a situation, you're in this panic setup, all of a sudden you find retailers and businessmen, they can't sell their product. And so the big cry is under consumption. Consumers don't have enough money to pay for the hula hoops and the Wheaties and that sort of stuff. Or you can say it's overproduction, somehow we've produced too much. That's the NRA kind of thing, you have to cut down production and so forth, and systematically chopping up the pigs and all that sort of stuff, Reduced production is too much, that causes a recession. If you look at it, the whole thing is a series of nonsense fallacies involving all of this. The idea that you can have overproduction when half the people are starving is pretty absurd. There will never be overproduction until we reach the Garden of Eden, if we ever do.

25:57Until then, there's always scarcity as far as we've been talking about, the abundance versus scarcity thing.

26:31The Garden of Eden model. The other thing is underconsumption, and that's another very peculiar thing if you look at it. How come the consumers suddenly have less money? Before October 29, 1907, consumers had plenty of money in their rateshakes, all of a sudden they think they don't have any money to spend. That's kind of peculiar, too. If you look at that, you find out what the consumers are really saying about this overproduction and underconsumption thing is it's not that they can't sell their product. It's all nonsense. You can always sell your product. If you're invested in too many hula hoops, and the hula hoop craze disappears and you're stuck with 10,000 hula hoops The whole point is, for some reason, businessmen have paid too much, they've bid costs up, they've bought the hula hoops or the frisbees or whatever, for a price that turns out to be too high for them to pay,

27:53The problem is in the price system, something has happened to screw up the price system. And the problem is overbidding of costs, and when the cost for overbidding of costs is discerned by the Austrian theory, which is that businessmen have been induced by the cheapening of credit and the artificial expansion of credit into the business system to bid up up wage rates and bid up costs too high in relation to that, because of this inflationary credit expansion, too high in relation to what they could be doing, would be getting on the free market when this whole expansion process stops. And finally, another aspect of this under-consumption nonsense is, if you look at any business cycle, including the 1929 depression, you find out the consumption industries are in relatively pretty good shape.

28:44I mean, they are less depressed than the construction and machine tool industries. So, for example, retail sales, all the papers, you know, you're looking for the business cycle. The first thing they look at is retail sales. How's the health of the economy? Retail sales are in great shape. So we're doing well. The thing is, retail sales are almost always in great shape. They only, from 1929 to 1933, they fell, I don't know, something like 20 percent, which is, they fell less than almost anything else. At the same time, manufacturing production, construction was falling by a huge amount, 75 percent, 90 percent, 50 percent, whatever. The Depression always hits the, what happens in other words, we look at consumption goods and capital goods industry. The consumption industry boom is something like this, boom bust kind of thing, and the capital goods industry is wildly going up something like that.

29:36So there's a much bigger boom in the capital goods industries and a much bigger depression in the capital goods industries, but you've got to bear that the Austrian point, there's overinflation in the capital goods industries and then the whole thing collapses as you I may as well conclude with a story here about unions and construction and so forth, which relates the relationship between wage rates and unemployment, which I'll get to a little later. Anyway, this is told to me by Leo Wolman, my professor, who is extremely expert in all The construction union has always been powerful, and there has been an enormous depression in the construction industry, there has been an over-construction in New York and every place else in the 20s.

30:29As a result of Manhattan, the union is very firm, and it's consistently on boom level wage rates. Here we are in 1933, and prices have collapsed all over the place, and construction is down to almost zero. And the union is just as high in wage rates as it had in 1929, which means that the real wage rates, and those wage rates in terms of purchasing power, is way increased. As a result, there's no construction in Manhattan, no buildings, stops. The other hand, Queens, we have also construction unions. In Queens, the unions were smaller, the employers were smaller, the more personal relationship, you know, you hire five people instead of 500. So in Queens, there were secret deals between the construction employers and construction unions where they'd say, look, you know, they sat down together and said, okay, we realize there's a danger of having no construction at all going on. You see what's going on in Manhattan with no buildings being built. So, okay, we can't officially say we'll

31:23We'll accept the 30% wage cut, let's say. But, what we'll do is we'll keep the same wage rate and we'll kick back 30% on the table. And as a result of that, there was a construction, you know, relatively flourishing in Queens. There's only a small drop, a much smaller drop in Manhattan in Queens construction because of these, because the unions are willing to accept much lower wage rates under the table because they couldn't break union solidarity, in quotes, officially. Okay, so this sort of introduces the boom-bust theory and money theory. I just want to set the stage for the 20s, just for a minute, by saying what happens after World War I. The point is that since 1914, the entire international monetary system has been kaput, basically in a state of advanced decay, the suet-to, chaos, etc.

32:11The golden age was before 1914, especially from 1815 to 1914, that was the classical gold standard. Ever since then, we've been trying to get the good parts of the international gold standard without the headaches, without the discipline, so-called, which governments would have to regiment themselves into obeying. So what you have is, essentially after the war, I think I mentioned that all the countries except the United States were off the gold standard because they all inflated. We now begin to see the hubris of Great Britain. Before World War One, Great Britain was the great center of international monetary affairs, international financial dealing. London was the great center of the heart of the gold standard. But now the pound was depreciated. I think the pound was then under something like three dollars and fifty cents in 1920.

32:58The pound had always been four dollars and eighty-six cents. This is a classic. The basis was the different weights of gold, the definitions of the dollar and the definitions of the pound. It worked out that the dollar was equal to four dollars, the pound was equal to four dollars and 86 cents. This has been the classic, the whole 19th century, this has been the fixed thing, this is now part of the British heritage. All of a sudden the pound is down to 350 because the pound has been inflated. When you inflate the currency, the price on the world markets gets cheaper. So now the question is, what would Great Britain do? What do you do about this situation? Here you are, the war is over, the pound is depreciated, and you have several options open to you. One option would have been to cut your losses. This would have been the rational option. Cut your losses, say, okay, it's too bad, we've inflated, and we have much more, many more pounds in circulation than we have before, and the pound is now 350.

33:54We'll go back to the gold standard of 350, and we'll encourage all the other countries to go back at the current level, and we'll start from there, we'll cut our losses. This would have been the rational thing to do, it was almost nobody was in favor of it, typically, typically of the rational option. Virtually nobody, maybe one or two economists, maverick economists here and there, said, you know, this is really the easiest thing to do, the simplest, you have less headaches, no, no, this is out. So that option has cost that, going back to gold as a new level. So that's one option. That's cost that. That doesn't even get consideration, much less a kind of serious study. The consideration was adopted, the idea of going back at the old level, going back at the old 486, because Britain, British heritage is now 486.

34:43We can't accept that the value of pounds is a terrible thing, and our credit will be doomed, and so on and so on. So you have this quixotic decision to go back at 486. There's a third plan, this is the plan of the left wing crazies, so to speak, in those days, at least they're considered in those days, of abandoning gold altogether and just go over to fiat currency. This is a minority, much bigger than the rational minority, but not very strong yet. When we go back at 46, by the way, the guy who does it, the guy who was chancellor of the checkered in 1925, I guess it was, on the decision when the thing was finally completed, the chancellor of the checkered at the time was Winston Spencer Churchill, Winston Churchill, John Maynard Keynes writes as far as I can tell, the only good thing he ever wrote, which is a little pamphlet called Economic Consequences of Winston Churchill, pointing out, predicting what was going to happen, fantastic mess because of the systems

36:00The British have decided to go back in 486. What does this mean? How can you go back in 486? It means that now the British pound, even though its goods are priced essentially at 350 everywhere, it means the price of British goods will be anastronomic compared to other markets. The British exports will be frozen out of world markets. He's really sort of a quasi-lunatic kind of policy, especially due to the fact that England lives off imports. England is a very small country, and they import food and so forth and so on, and their major exports were coal and textiles and shipbuilding, and these were sort of declining industries anyway. These were industries that were pretty well, not exactly have had it, but I mean they're the hand of, you know, the hand of on the horizon for coal and textiles.

36:54and shipbuilding, but anyway those days are still pretty strong. So England has to have cheap export, may have to have a competitive kind of export system, but here we are imposing an enormous burden on the export industries. We're saying that the coal and textiles and the ships are gonna be priced down something like 30% higher on the world and for this whole policy in effect. So Britain is now, Britain has this problem, they're committed to this 486 nonsense. Committed at a very high prices. What can they do about it? How can they, how can they The United States survived. As a matter of fact, what happens is that all during the 1920s, when every other economy was booming, the United States, Europe, Britain's economy was depressed. Britain had a 20-year depression, because Britain had this very heavy... exports weren't going, and they had very heavy unemployment in the export industries.

37:40So what do you do about it? Well, several things. Given this insane matrix here, the rest of the British policy is extremely cunning and Machiavellian to the hilt. I mean, within an unworkable policy, they did the best they could. So what do you do? First of all, the classical policy would have been to deflate. The 19th century policy is, all right, you want to go back to 486, our prices are now 30% higher than the competitive, we forced the price level down 30% by lowering the money supply by 30%. We put the economy through a deflationary wringer. Now, what would have been done in the old days, they couldn't do it in the 20s because they felt they couldn't do it, because now we have, after World War I, we have a very strong unionized system, bolstered in Britain, bolstered by a big unemployment insurance, national unemployment insurance scheme, So that means any worker that strikes can zip over to the Unemployment Insurance Bureau and get his pay from then on.

38:36It was impossible to deflate. They felt that we would have been, you know, like 90% unemployment, because wage rates would have been up there. So they felt it was politically impossible. If they had the guts to do it, if they had a really strong laissez-faire Tory type, they could have done it, perhaps. But they felt they couldn't do it. There's a lot of labor unrest and general strikes and all that. and so they couldn't deflate and they couldn't not go back at 486 because of their cookie original decision. So what can they do about it? They wanted to keep inflating as a matter of fact. They wanted to continue to have cheap money and inflate some more and get around union wage rates that way. So here they wanted to inflate, not deflate. They wanted to go back at 486. How can they manage this? Well, basically in two ways. One, getting everybody else to go back to the gold standard at an overvalued rock mode.

39:24In other words, if you're in Bulgaria and your currency is a bull bar, and the thing is that Britain had total political control of Europe by this time, full of League of Nations, which was essentially a British outfit, a financial committee of League of Nations run by the British Bank of England. And so what you do is you send experts beaming into Bulgaria and every place you can get your mitts on, and you tell them, and you tell them, we want you to go back to the gold standard, none of this fiat money, none of this other thing here, we want you to go back to the gold standard of a very highly overvalued, Rachman, Bogart, whatever that currency is. So in other words, you can force Bulgaria to go back to the old car, that means the Bulgarian exports are now in big trouble, and English exports to Bulgaria are now cheaper.

40:12So in other words, the British policy then becomes this cunning Machiavellian policy of getting all the other European countries to overvalue their currency and go back to the gold standard at that level, and to work out a system of the United States, so-called gold exchange standards, which I'll talk about tomorrow night, and use the United States as sort of a patsy in this whole situation, and then force, or they couldn't force, induce the United States through various sinister means to fight also. and the danger of England losing gold to us. If we kept inflating, we kept our inflation in pace with the English inflation, and Britain could not have to lose gold. So during the whole 1920s, the whole international monetary picture is a series of shoring up measures to help Britain, you know, help Britain get out of the consequences of the decision to go back in 486.

41:02I'm going to go on to that one more time. Thank you. Okay, back to the 1920s inflation. One point for exactly into the 20s, I was talking about the Austrian business cycle theory. First of all, I should have made it clear that I said there were two types of theories, causal theories, the money and banking in one hand and really an industry in the other. I was placing myself in the Austrian theory in the and Monetary Camp

42:00and the Bank of Business again. So there are fluctuation situations, but there's no need for them to be general across the whole system and mess up the whole unemployment and bankruptcy and it should be fairly predictable in that sense. So in the capital, remember I said the capital goods industry is fluctuating much more intensively, much greater degree than the consumer goods industry. So this means that in the recessions What's really going on here is that the capital goods industries are collapsing, and their prices are going down much further than the capital goods industries than the oil and consumer goods industries. And this shift of price behavior serves to readjust resources, land, labor, and capital, back from the over-invested capital goods industries into the consumer goods industries.

42:50In other words, it's due to the reshuffling of resources. Now this means then, let's say consumer goods prices go down by 20%, a big depression, and machine tool prices go down by 45%. What's really happening here is the consumer goods prices are going up relative to other prices. So in other words, the idea that consumer goods are rising in a recession is not really a new thing, it really happens in every recession. The reason why nobody's seen this until fairly recently is this. And every other recession until 1958, every classical recession, there's also been a contraction of the money supply. The money supply had a one-shot model here. So the money supply goes up and boom and collapses and there's a depression and there's a bad credit contraction.

43:36As that happens, the whole bowl of wax has moved downward. So the oil prices are falling. And in this sort of example, consumer goods prices falling by 15%, 20%, capital goods prices falling by 45%. So the consumer, when he's looking at this, he's satisfied in the sense that the least consumer goods prices are falling. But relative to other prices, consumer goods prices are going up. But this situation is masked, so to speak, or offset by the fact that all prices are falling due to this monetary contraction. So the Austrian business cycle here explains the reason why consumer goods prices go up relatively to other prices. What's happened The inflation of the 30s took place. Prices were going up in the middle of the big depression.

44:24It starts in 58 again, and then in 69 and 71, where consumer goods prices particularly keep going up. One of the explanations for this is that there is now the rule, the political rule in the United States, that money supply and bank stocks shall never be allowed to fall again. The money supply can't fall ever again. This means the price level will fall ever again. So the price level, this process of the whole price level falling, which has masked this process, is now removed. The bail is taken off, you strip away one bail, you find out, by God, consumer goods prices are going up in a recession. It's a monstrous thing. But the point is, it's been happening all the time. Its effects have been offset by deflation. This is one of the great things about deflation. The great thing about deflation is, the good thing about depression is the price is full.

45:12I mean, from the point of view of the consumer, which should be a general point of view. My father, for example, those who happened to be employed during the Great Depression were doing pretty well. My father's most prosperous time of his entire life was during the Great Depression in the 30s, because he happened to continue to be employed and prices were collapsing and he bought all his furniture and so forth and so on. So, but now we have a situation, due to the Keynesian, the wise measures of the Keynesian economics and the various Democratic and Republican administrations, we now have a situation where every time we have a recession we won't be able to enjoy falling prices, the prices are going to keep going up. We're going to suffer the worst of both worlds, so to speak, we're going to have bankruptcies and unemployment, suffer a separate falling production, and prices are going up. It's going to be a beautiful system, a beautiful system to look forward to.

46:02So this essentially is what happens, but neither the Keynesian nor the Friedmanite business cycle theories have any explanation for this at all. And it's only the Austrian theory that's kept close in terms of the consequences on the micro system, so to speak, of the macro movements. So as a matter of fact, well, this is a favorite story, which I've repeated at least a dozen times or so. Peter Yemen, it fits in, great story. One of my professors at Columbia when I was going to graduate school was Arthur F. Burns. In those days he was a high theorist and not interested in politics. And he was tapped by the Rockefeller axis. When Eisenhower became president, he became the chairman of the Council of Economic Advisors.

46:50And when he left, incidentally, it's interesting what happened when the professor entered his government. Because before he left for Washington, his lectures were fantastic, with theoretical analyses of Keynes, Chamberlain, Robinson, and all the rest of it. When he gets back from the government after several years in the head of the Council of Economic Advisers, his lectures consist of story anecdotes about what he said to Eisenhower, what Eisenhower said to him, what he said to Rockefeller, and so on. Sort of anecdotal history of his life. And at any rate, he gives us a series of lectures, just as he was getting out, and just after he had gotten out, and just when the recession of 58 was hitting, which was the first time it was officially recognized, we had this peculiar phenomenon of an inflationary recession.

47:36An inflationary recession violates all the rules, all the Keynesian rules and all the Fremontite rules, because what you're supposed to be doing in a recession, according to the Keynesians, when you see a recession, you pump spending into the system, get deficits, In the old Chicago school theory, you pump money into the system. You don't bother with the spending, you concentrate on the money supply, you pump that in. And the eclectic types, you don't want to choose between Keynesianism and Chicagoism, so you pump both then. You won't push both stops. You're pumping spending and you're pumping half-deficit and, why not? Half-deficit and an increase in inflation. And then what you're supposed to do in the boom, you see an inflation runaway. And then what you're supposed to do in the boom, you see an inflation run, right? You go to the other side of the dial, and you say, okay, now we pull spending out of the system by raising taxes, or we contract the money supply, or whatever.

48:23So all of a sudden, here we have a cinch in, but all this, this sort of contrast cyclical policy in the school rests on a couple of key assumptions, one of which is that all things are moving in the same direction. In other words, during a boom, prices are going up, and spending is going up, etc. et cetera, and during a recession prices are falling and you have bankruptcy and unemployment. So Burns was outlining this whole doctrine. I was supposed to be a neutral observer of this thing, and I couldn't refrain from plunging into the situation, this is my motto. So I said, well Professor Burns, this is during the question period, what happens if we continue to have this inflationary recession? And what policies would you advocate for in a recession and prices are going up and unemployment is, you know, everything else is falling. Unemployment is increasing and so on.

49:09So he says, well, it's not going to happen now because 58 recession is almost over and two months will be out of it, there's no real problem. And I said, okay, you know, conceding that, what would you advise if sometime in the future we will have an inflationary recession? And he stops a minute and he says, well, he says, he speaks like W.C. Fields without the humor. Well, he says, in that case, we all have to resign. So, he hasn't resigned, of course. Nobody resigned during this. But that was the, it was really an admission of the fact that these people really have no answer to that, because of the current set-up. Okay, back to the 1920s. I think that's another rule, as far as we can see, another rule of bureaucracy.

50:27The design of conning, bludgeoning, whatever, all the other countries to inflate, the European countries to go back to the gold standard, over value, Zotti, or whatever the currency is, and the United States to play along with the system. The British plan, the grand British plan was unfolded at the Genoa Conference of 1922, which is very little known in the textbooks. It was one of the key events in modern 20th century monetary history. It was engineered, the theoretics of it was worked out by another Mephistophelian economic theorist working for the Bank of England, Sir Ralph Hortry, a redistinguished economist, and works out the essentials of this plan.

51:12The big clout, the person running the English monetary system during this whole period was the head of the Bank of England, Montague Norman, a key figure in this whole business. Montague and Norman used to have, really the conspiracy theory works beautifully here, almost acknowledged by everybody dealing with this whole thing.

51:44Because what happened was, Norman and Benjamin Strong had a constant series of secret conferences, and they really were secret.

52:19In the past, when we were in the press, Norman was coming over, not telling anybody in the press. He would come over to the same hotel in Saratoga, and he would register as Professor Skinner for some reason. I didn't check up about why he was this alias. Nothing to do with psychologist Skinner. And he registered as Professor Skinner. They have these secret talks, and Norman slips out in the middle of the night, and Strong slips back. and so there's a very strong connection of most historians interpret this I did a little bit myself of enormous exerting sort of spangali personal influence on strong well I might have been some of them involved but one of the things which is usually overlooked of course is you can hear it now and you know say that the units and the influence of the Morgans Benjamin Strong already said was with Montague Norman, the J.P. Morgan Company continues to be the fiscal agent for the Bank of England during this whole period.

53:19Second of all, Montague Norman came from an old international banking family. He was a former partner of the London investment banking firm Brown Shipley Company, which was the New York branch, The Brown Brothers Company in New York, the great international banking firm, investment banking firm. And he personally had worked, Montague Norman had worked in the Brown Brothers Company in New York for several years, and his grandfather had been a partner of the firm, with a whole tradition in the family. Brown Brothers later of course becomes Brown Brothers in Harriman, and was in many ways associated with the House of Morgan in this international banking consortium. So we have the Morgan thread running through the charism of the Spangali influence and all the rest of it, so reinforcing the two of them, and we'll take our choices, which was more important.

54:10At any rate, so we have the Genoa Conference, 1922, in which England unveils the grand, the master plan. The Master Plan is essentially like this. It kind of happened before the war. If you see any resemblances between this and Bretton Woods, that's it. It's virtually Bretton Woods pre-figured. The classical gold standard is, remember, each country has their own currency, notes in the pockets, pyramid on top of gold. So this would be pounds, and this would be francs, and so forth. The French would have gold, and the Germans would have marks, and so forth, and so on.

54:56So this is the classical gold standard. So now we have another system, invented by England and pushed through the whole world. called the gold exchange standard, the new razzle-mazzle thing which Roman has come up with, Roman and Hortry come up with. So instead of having the gold standard, we have the gold exchange standard, which everybody said, well, it'll be the same thing as the old gold standard, the same thing, just more economical, will economize on reserves. The theory now is, all these other countries, Bulgaria, Greece, Latvia, are supposed to pyramid their stuff, not on their own gold supply, don't think they're supposed to have gold anymore, it's obsolete, send all the gold to Washington and London, that was the concept.

55:48So all these other companies, Bulgaria, as they have the logo, or whatever the Bulgarian currency is, they're permitting Bulgarian notes on deposits on top of now, not gold, or not gold, but the pound, the British pound or the dollar. And the same thing happens with Greece and South America. You have all these guys. You have, in other words, this whole international system of all these guys permitting notes of deposits on top of the pound. On top of sterling reserves, pound sterling reserves, state hold in London, consisting of, you know, the bank deposits in London with short term treasury bills. and then also on the pound is supposed to be permanent on top of dollars, the British is supposed to be holding up really gold so much with dollars, these two currency, these two base currency, they're called the key currency of the system, so several banks that are told and induced and arms twisted aside to take them to, you know, why mess around with gold, gold is unproductive, keep your money in London, keep it in Washington, keep it especially in London

56:59The result of this diabolic scheme is Britain has its deficit in the balance of payments, but nobody in Bulgaria, Romania, Greece, etc., they don't call on Britain to repay in gold anymore because they're using the reserves to permit their own stuff on top of. So this looks like an endless thing, it looks like a new magic thing, like a perpetual motion machine as far as mentioned in the day. Why, oh boy, this is terrific! Britain can inflate as much as they want, and the deficit of the balance of payments, and the money flows out, but instead of the France or Germany or whatever calling upon Britain for redemption, they use these pounds as part of their own base of money supply, they come on top of that, and Britain can inflate forever and no retribution will ever be set upon it.

57:45This is what happens with Bretton Woods from 1944 to 1971, except the United States pushes Britain out of the key currency and takes over. It's essentially the same thing. Retribution comes eventually, but it takes quite a while. So, Keynes' famous statement is that in the long run, we're all dead, so we shouldn't worry about the long run. One of the jokes of history is that we're now in the long run. Keynes is dead, and we're here. We're suffering in the long run. To bolster this, bolster this idea of the gold exchange standard key currency, of course this is really required, obviously, Carmen. It tells the public, you don't need any gold coins anymore. Forget gold coins. It's more like a barbarism.

58:33Give it away to your kids at Christmas maybe, but last night I forget it. So, Britain and of course these other countries don't redeem their money in gold anymore. They redeem it in gold coins and more. They redeem it in gold billions. They redeem it at all. The idea is, leave gold for your international transactions, the big transactions. The gold bunion, the gold bar is, what is this? Taurus mentioned the gold coin the other day, it's something like $1,100 or whatever. And so you can't break the bar down, you know? I mean, gold coins can be used by everybody in everyday transactions. If you can't redeem money in less than the gold bar, then you're limiting the whole thing to international trade and to big business and so forth. You're taking gold out of the system, in effect. So in addition to the corollary to the gold exchange standard, we have the gold bullion standard.

59:19Only the United States remains on gold coins, and we're just trying to discourage it as much as possible. We're laughing, we're trying to sneer at it and say, you know, okay, you can get gold coins if you want, but it's really, you know, you're really being pretty ridiculous. You're an old rube and you don't understand modern banking and that sort of stuff. But we still are at least nominally on the gold coin standard, and the other countries would not be more sophisticated The third arm of this, as I mentioned, is that Britain is inducing or forcing Bulgaria and Romania and Greece to go back at overvalued lochies and overvalued drop funds, etc., in order to hurt their exports and stimulate British exports to those countries. They were able to do, and also, those countries which were too backward to have a central bank, Britain forced them to have a central bank, because if you don't have a central bank, you can't really inflate very well. You can't play your part in a great general conference game.

1:00:15So, Britain controlling Montague Norman and his ally as agents and theoreticians, controlling the Financial Committee of the League of Nations, using their fantastic political agamic clout to bubble these guys in the line, set up a central bank for them, get them to come back with a gold bullion standard, a gold exchange standard, and lower values, latte, etc., etc. Essentially, Britain was running in one way or the other, the monitoring of financial The financial systems are the following, at least the following countries in Europe, Bostria, Hungary, Danzig, Estonia, Greece, Bulgaria, Belgium, Norway, Italy, Portugal, Yugoslavia, Poland and Romania, virtually all of Europe, with the exception of France, which is going to go back at hard money, but France was induced by British pleading on their knees, please don't call on sterling redemption to break the whole system, and so France was piling up sterling reserves also.

1:01:09All of this was done in conjunction with the cooperation of the paternal blessings of J.P. Morgan and Company, which helped as much as they could in fueling the thing, or lending money to the Bank of Yugoslavia to get the thing going, and so forth. Okay, but the key to making the thing work was the cooperation of good old Lincoln Sapp down here. The only country that was continuing on the gold coin standard. And we had to keep inflating. We had to make sure that Britain wasn't losing too much gold to us because of their inflationary policies. We obliged them. As soon as Norman was appointed, as a matter of fact, during World War I, Benjamin Strong sends him a letter hastening the promise of services.

1:01:54They're all the oddly phrased letters, I remember it. In 1920, Norman starts making these annual trips to the United States to see Strong and Strong makes trips to see Norman, etc., etc., and they have this secret thing in them, trips to Saratoga, and so forth. Several big inflationary impetuses in this thing. The first big one was 1924, when the Federal Reserve system enters the open market, dictated by Stalin, and buys an enormous amount of government securities in order to push down interest rates and inflate the money supply in the United States and keep prices up again.

1:02:39What had happened was, this was supposed to smooth the way for Great Britain, Great Britain was going to go back to gold in 1925, and so we had to inflate to help us smooth this process along. Actually what had happened was, the pound, after Britain announces the fact we're going back to the pound in 1946, 1925, the pound of course shoots up again, it goes back to about $4.70, $4.70, In 1923, from 1923 to 1924, the British financial policy was so unsound and inflationary that the pound dropped anyway, even though the Britain was saying in one year we're going back at 486. Still the value of the pound on the international foreign exchange market drops from $4.70 to $4.32 by mid-1924. So Britain was in very bad shape here.

1:03:251925, we're going back, we're going to 486, we force all these guys to adopt all this stuff in a great shape, and here they are, here on the world market, the pound was down to 432, so this is a crisis. So strong, the woman calls on strong to inflate, strong inflates, and the British pound strengthens again, goes back up to $4.78, because the United States' prices are rising. Actually, there are two things involved here. When the Federal Reserve buys government securities in the open market, you're doing two things. One, you're inflating the money supply, the bank deposits, and you're pushing US prices up. You're also, at least temporarily, pushing down American interest rates. Obviously, the government floods in and buys all this stuff.

1:04:11The demand for bonds goes up. It means the interest rate is full. And so you're pushing down interest rates. and when you're pushing down interest rates, much of short-term world capital, at least, and even long-term world capital, depends on where you can get a higher interest return. If you can get 7% in the United States and 3% in England, there's not too much world capital that's going to remain in England. You have this tendency toward uniformity. So we also try to push down our interest rates in order to keep Britain from losing gold to the United States. It's a double-pronged thing. And it worked. It worked in the sense that immediately, in a few months, the pound strengthens again, goes up to 478, and they're ready to go back to this gold exchange standard, and we go on to the gold exchange standard. This is a deliberate policy, a strong right to Andrew Mellon on May 17, 1924. Andrew Mellon is the Secretary of Treasury. Of course, we don't have to wonder which interests Andrew Mellon represents, because Andrew Mellon is Andrew Mellon.

1:05:09The burden of this readjustment, by this he means, well he starts off by saying we have to raise the United States price levels relative to Great Britain and we have to lower American interest rates relative to Great Britain in order to permit Great Britain to, quote, return the gold, unquote, and really it wasn't much of a return, it was really advancing onto this peculiar new abortion of the system. The burden of this readjustment must fall more largely upon us than upon them, Great Britain. It willivid be difficult politically and socially for the British government and the Bank of England to face a price liquidation in England. In other words, to take the route of deflating.

1:05:54So it will be difficult politically and socially. In the face of the fact that their trade is poor and they have over a million unemployed receiving government aid. So we're going to do this to help Britain. So, for example, while in 1922 and 1923, the interest rate on American bills in New York was above the rate in London, by mid-1924, the Federal Reserve system managed to push interest rates in New York below those in London, this checked the gold outflow from London. Also in 1925, the United States helped by the New York Fed lends Great Britain a line of credit in gold of up to $200 million, in case they need it at any moment. and JP Morgan and Company authorizes a line of credit of $100 million to be subsidized in complicated ways by the Federal Reserve system also in case the Bank of England needs it and similar credit by the New York Fed was extended again to permit these countries to come back to this kind of system to the central banks of Belgium, Poland and Italy.