The Macroeconomics of the Fed: Mainstream and Austrian

0:00What are you all doing sitting here? Why aren't you out spending money stimulating the economy? I'm going to tell you about a plan that will help you go out and spend money, or actually force you to go out and spend money. A plan that many modern macroeconomists are now, or some at least, are now pushing. So let me sort of give you an introduction to what macroeconomics has been all about. about, really a morbid fear of hoarding has haunted macroeconomics since its beginning in the writing of John Law in 1705. Most macroeconomists have proposed to solve the problem of people not spending enough by flooding the economy with cheap money created by a central bank.

0:48But what if people will not lend or spend this money? As seems to be the case in the One proposed solution is to tax hoarding by deliberately stimulating fears of runaway inflation among the public by having the central bank announce a very high inflation target, say of 6 to 10 percent per year. Another solution is to levy a carry tax on currency and bank deposits so that money becomes is like rotting potatoes, and people rush to spend and lend it, even at negative interest rates. This is being proposed. Now, this proposal has been presented in fancy scientific-sounding terms, but like all other macroeconomic terms or policies, this policy had already been advocated by an earlier monetary crank.

1:41Well, that's the name that we gave to macroeconomists in the 19th century, before Keynes wrote. And it's still the correct name I would claim. Silvio Gissell was the name of the writer who first proposed a tax on hoarding. He called it stamp money. It is worth briefly examining his original plan to get an idea of the quality of his thought. I will also briefly review the reactions of some famous macroeconomists to Gissell and his scheme before talking a little bit more about the modernized version of his plan. Now, Gissell was born in Germany in 1862. He emigrated to Argentina in 1887 where he became a successful merchant and began writing on monetary reform in 1871.

2:31That's always a bad sign. A successful merchant writing about monetary reform. He got caught in a depression, wondered why his success disappeared, claimed it was not his fault. So he looked at the economy as a whole. He soon returned to Europe, where he took up residence in Germany and Switzerland and continued to write and form, living on a vegetarian community for a while, and founding and publishing two magazines. He was married, had three children by his wife while carrying on relationships with three other women whom he convinced at one point all to live together with him. The reports say that the arrangement did not last. In 1919, he served as People's Representative for Finances of the Bavarian Soviet Republic.

3:18You've probably never heard of that. He immediately drafted a law to implement his monetary scheme, but his term of office lasted only seven days as the Bavarian Soviet Republic came to a swift and bloody end. Gissell was arrested and detained for several months before he was acquitted of treason by a Munich court-martial. Nevertheless, because of his participation in the Soviet Republic, the Swiss government barred him from ever returning to his farm in Switzerland. Juscel's monetary scheme was based on his belief that economic depression was a result of an asymmetry, a difference, between the supply of goods and the demand for goods. Goods, by their nature, are perishable. They deteriorate in quality and quantity over time. Their supply to the market, therefore, cannot be postponed at all or for very long, according to Juscel. Once they are produced, the owner is compelled to offer them for sale. The supply of goods is determined by technical factors and is not are subject to human will.

4:17Juscel expressed all this in very colorful language. Rust, damp, decay, heat, cold, breakage, mice, moth, flies, spiders, dust, wind, lightning, hail and earthquakes, epidemics, accidents, floods and thieves wage war continuously upon the quantity and quality of goods. Few goods fail to exhibit the results of this warfare a few days or a few months after their production. It is precisely the most essential goods, food and clothing, that are least able to withstand this warfare. I'm still quoting DeSalle here. The only way an owner of goods can protect himself against such losses is to sell them. He is compelled by the nature of his property to put it up for sale. If he resists this compulsion, if he resists this compulsion, he is punished, and the punishment is carried out by his property, We may therefore regard supply of goods, that is the demand for money, as identical with the goods themselves. Supply is independent of deals on the market. Supply is a thing, a material, not a business transaction. Supply always equals the stock of goods in existence.

5:30Okay, that was a quote from Gissell. According to Gissell, things are much different on the demand side, where people use money to demand goods. The demand for goods is composed of money, gold money to be precise. Because gold does not deteriorate with the passage of time, demand can always be postponed without loss, if the buyer believes that the conditions for exchange are unfavorable and will improve in the future. In the future, demand, in contrast to supply, is therefore very much subject to human will. Again, Juscel gives us an entertaining account of his views. Gold may be regarded as a foreign matter, intruded upon the earth, and successfully withstanding all the destructive forces of nature.

6:15Gold neither rusts nor decays, neither breaks nor dies. Neither frost, heat, sun, rain, nor fire can harm it. The holder of money made of gold need fear no loss arising from the material of his possession, nor does the quality change. Still quoting, the possessor of money can therefore postpone his demand for goods, he can use his will. He must indeed sooner or later offer his gold for sale, for in itself it is useless to him, but he is free to choose the time at which he does so.

6:53So Gissell's idea of commercial crises, he found in the disparity between supply and demand. The fact that demand using money can be withheld from the market where supply must always be brought to the market. And when demand is withheld, prices begin to fall. Merchants, seeing prices falling, do not want to buy goods because they're fearful that their profit margins will disappear, according to Gissell. And as a result, the sellers of goods become even more desperate to sell them, cut their prices further, and a vicious cycle occurs in which demand continues to withdraw, people hold more and more money as prices fall, and other people are desperate to get rid of goods. So we go into a crisis.

7:41Now, Gissell proposes to deal with the scourge of commercial depressions by attacking it at its roots. That is, by destroying the superior power of demand over supply. This involves destroying money's attribute of permanence and subjecting money to a process of deterioration of value that will encourage its possessor to spend it as quickly as possible. Jassell introduced his monetary reform proposal with the following remarks, quote, Let us then make an end of the privilege of money. Nobody, not even savers, speculators, or capitalists, must find money as a commodity, preferable to the contents of the markets, the shops, and warehouses.

8:29If money is not to hold sway over good, it must deteriorate, as they do. Let it be attacked by moth and rust. Let it sicken. Let it run away. And when it comes to die, let its possessor pay to have its carcass flayed and buried. Then, and not till then, shall we be able to say that money and goods are on an equal footing and perfect equivalence. We must subject money to the loss to which goods are liable through the necessity of storage. Juscel vividly described the properties of his ideal medium of exchange in the following terms. He said, our goods rot, decay, rust, break, so only if money has equally disagreeable loss involving properties can it exchange rapidly, securely and cheaply.

9:17For such money can never on any account be preferred by anyone to goods. Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods by the purchaser or the seller. We then part with our goods for money because we need money as a medium of exchange, not because we expect an advantage from the possession of the money. So we must make money worse as a commodity if we wish to make it better as a medium of exchange. Okay, so what plan did he have in mind to turn money into rotting potatoes?

10:02To endow money with the property of rotting potatoes, Gisele proposed what he called the free money plan. Without going into too much detail, under this plan, a paper fiat currency, let us say dollars, would be issued. The reverse side of each bill would have rows of spaces for stamps equaling a total of 52 spaces, and I have a picture of this, if anyone wants to see it later on, I can't really put it up, Giselle actually put it in his book. So the reverse side of each bill would have 52 weeks, places to put stamps weekly on the bill. The first space would bear a date in the first week of the calendar year, and each subsequent space would bear a date one week later than the date in the previous space.

10:52Before the bill could be spent as legal tender, its stamps would have to be current. That is, if Wednesday's dates appeared in the stamp spaces, then a ten-cent stamp would have to be purchased from the bank or issuing agency, and a fix to the bill for it to be accepted as legal tender from a given Wednesday to the following Tuesday midnight. At the end of the year, the bill would be returned to the bank or government issuing office bearing all 52 stamps and replaced with another unstamped bill of equal denomination. So, during the course of the bill's circulation over the year, $5.20 worth of stamps, equals 52 weeks times $0.10 per week, would have been purchased, or 5.2% of the value of the $100 bill.

11:38This means that if an individual did not spend the bill in a week in which he received it, he would lose one tenth of one percent of the value of the bill in the form of the ten cents he would have to pay for the stamp to make the bill legal tender current the following week. And it would cost him ten cents every week thereafter that he maintained the bill in his possession and did not spend it, lend it or invest it. This would be, in effect, a 5.2% annual tax on hoarding. Another way of looking at it is that currency would earn an interest rate of negative 5.2%. This is what Macri Comps would love to do. They'd love to push interest rates down below zero. So people would have to be forced by the fact that money is deteriorating at that rate to loan at interest rates of 2 or 3%.

12:29If you're losing 5.2% of the value of your money every year, you'll loan at negative 3% or negative 2% if you don't want to spend it on consumption. Now you and I, this would create an incentive if one did not wish to spend the currency on current consumption to lend money even at very low or negative interest rates. In this way, Gissell argued, the hoarding problem would be solved. Interest would be abolished and commercial depressions would be banished forever. Now, you and I recognize Ducell as just a garden variety quack, peddling yet another quack cure for what ails the economy, but you might be surprised to learn that two of the most prominent macroeconomists of the 20th century, Irving Fisher and John Maynard Keynes, thought very highly of Ducell and his monetary scheme. It is even more surprising to learn that contemporary macroeconomists have advanced modernized versions of this and his plan to extricate us from our current recession.

13:32Milton Friedman called Irving Fisher the greatest American economist that ever or whoever lived. Whatever the merits of that judgment, it is true that Fisher and not Keynes was really the first modern macroeconomist. That is, he was the first one to consistently explain or attempt to explain the phenomena of Inflation, Recession and Unemployment in terms of carefully constructed aggregates and averages that is abstracting from human actions. During the Great Depression, by the way Irving Fisher predicted that the era of depressions was over, that in the late 1920s he said we have now found out how to stabilize the price level and we have now an era of for Perpetual Prosperity. He lost his very rich wife's entire fortune on that bed by following his belief.

14:25During the Great Depression, Irving Fisher endorsed Giselle's plan in the following words, and he was desperate to get out of the Depression, both for his own personal fortune and because his reputation had been so blackened by his misforecast. So he wrote, if only buying could be started first, business borrowing would follow, for the purpose of directly stimulating the buyers. A unique stamp dollar plan has been devised, a sort of stamp tax on hoarding. The plan offers the most efficient method of controlling hoarding and probably the speediest way out of a depression. That was in 1934, he wrote that. Desperate for a way out of the depression, which in the 1920s he claimed would never again occur, Fischer looked back in history and thought he saw a way out in the method used by medieval evil kings who regularly debased their citizens coinage. To Fischer, it seemed like a successful historical application of Giselle's plan. So he said that between 1150 and 1350, re-coinage was periodical. A ruler would call in all outstanding coins twice or three times a year

15:33and exchange them for new ones after deducting twenty-five percent. So depreciating the money by seventy-five percent over the course of the year. He thought this was a great thing, it would make people spend money faster. And he goes on to claim that this really gave us a boost to trade and handicrafts and so on. And he said, he called this debasement by the kings, the stealing of gold from from their subjects, the first example of something akin to velocity control, and it is of particular interest in the history of stabilization. This principle was forgotten until it appeared definitely in the writing of Silvio Gissell." Fisher actually wrote a small book in 1933, which I had never heard about before, entitled Stamp Script, in which he called attention to experiments with the issue of local stamp currency in Germany, Austria and the U.S. In this book he adapted Giselle's plan for use by municipalities, community organizations, private companies, etc. In a letter to a Canadian newspaper,

16:36Fisher proclaimed, quote, applied correctly, stamped script, could in fact haul us out of the crisis in a few weeks. I am a humble servant of the merchant Giselle, unquote. Keynes devoted five pages of the General Fury to Giselle and his work. He referred to Giselle as a strange, that's certainly true, unduly neglected prophet, whose work contains flashes of deep insight and who not only just failed to reach down to the essence of the matter, and who only just failed to reach down to the essence of the matter. Keynes reported that earlier in his career he was bombarded with copies of Giselle's works by his devotees. Keynes admitted, however, that initially he entirely failed to discover their merit, unquote, and treated Gisele's, quote, profoundly original strivings as being no better than those of a crank.

17:28Okay, well, his initial judgment was, of course, correct. In evaluating Gisele's free money plan, Keynes wrote, Gisele had carried his theory far enough to lead him to a practical recommendation, which may carry with it the essence of what is needed. Thus, the prime necessity is to reduce the money rate of interest, and this, he pointed out, meaning Giselle pointed out, can be affected by causing money to incur carrying costs, just like other stocks of barren goods. I have a few quotations here from other very prominent economists. I'll just give you a sample. One economist, Dudley Dillard, who wrote an influential book on Keynesian economics in the 1950s, wrote that Gisele's analysis is not completely developed in several important points, but all in all his model shows no fault.

18:21Now let me just turn to two Nobel Prize winners. Maurice Allais, French economist and Nobel Prize winner in economics, wrote, We would especially like to certify our great esteem for pioneers such as Proudhon, Balras, and Silvio Gissell, who accomplished the great reconciliation of individualism and collectivism that the economic order we are striving for must rest upon." That's a Nobel Prize winner speaking. Another Nobel Prize winner, Lawrence Klein, who built the first large-scale econometric model of the U.S. economy wrote in a very influential book called the Keynesian Revolution, quote, academic economists are ready to ignore the crackpots, well I guess so, especially monetary reformers.

19:08Johansson, Forster and Ketchings, Hobson and Gissell all had brilliant contributions to make in our day, but could receive no audience. It is hoped that in the future economists will give a sympathetic ear to those who possess great economic intuition. When you're an unclear writer and you don't make logical arguments, you have great economic intuition, as Keynes did. Okay, let me just finish up with a version of the modernized plan. Now, several eminent macroeconomists have explicitly advocated the deliberate creation of inflationary expectations among the public as a legitimate tool of monetary policy. And that includes Paul Krugman and a number of others, including Bernanke in his earlier writings before he was the chairman of the Fed.

20:01But, Greg Mankiw, the former chairman of the Council of Economic Advisers under George W. Bush, and the author of a top-selling textbook on economic principles, once famously dismissed Kane's general theory as an outdated book. And his textbook is pretty good, actually. He now argues that the Fed needs to convince people that we are going back to the normal inflation rate of 2-3%. In order to ignite the necessary inflationary expectations and stimulate spending, he suggested the following wording for a recent Fed press release. And he wrote the following, the Federal Open Market Committee recognizes that modern inflation would be desirable under the present circumstances.

20:48In particular, the overall level of prices a decade, hence, should be about 30% higher than the price level today. The Committee anticipates keeping the stance of monetary policy sufficiently accommodative, i.e. inflationary, to achieve that degree of inflation over the coming decade." Now that's what he would like to have seen the Fed write, worth rightly pointing out that they're going to create inflation. But given that the Fed cannot do that, he came up with another plan. So in this particular plan he was deliberately, or recommending that the Fed deliberately inflate away about 25% of the dollar's value over the course of the next decade. And as I said, that really wouldn't fly.

21:36So he endorsed also a proposal for driving the nominal interest rate below zero, that as a Modern Equivalent of the Scheme for a Carrying Tax on Money proposed by Silvio Giselle. In the intellectual exercise formulated by Mankiw, the Fed would announce that a year from, let's say, today's date, it intended to pick a numeral from zero to nine out of a hat. Okay, so there would be ten numerals in a hat from zero to nine. They'd pick a numeral out of the hat. A currency, all currency with a serial number ending in the numeral would instantly lose The Federal Reserve uses its status as legal tender. So if 8 was picked out, everyone would check their bills, and that bill would no longer be legal tender. That's 10% of the currency would be anesthetized, neutralized.

22:26This would cause the expected return on holding currency during the course of the year to be negative 10%. This is a 10% chance that the dollar bill you're holding is going to be worthless with a $100 bill or a $20 bill a year from now. What would the incentive be? To rush out and spend your currency and get our recovery restarted. This would allow the Fed to reduce interest rates below zero for a year because people would happily loan money for, say, negative 2% when faced with the prospect of losing 10%. At negative interest rates, many people would now have a strong incentive to spend the money immediately on consumer goods, which was the Fed's aim.

23:14Now, to be sure to Mankiw, this scheme was dreamed up by one of his graduate students. Although Mankiw maintains that the plan does address, and I'm quoting Mankiw, does address a fundamental problem facing the economy right now. Given the fall in wealth, increases in risk premiums and problems in the banking system, The interest rate consistent with full employment may well be negative, and there's a Fed study saying that in fact a few years ago that the interest rate should be negative 5% in order to get the recovery started. So we've come full circle, okay? Macroeconomics has gone back to its roots, to these crazy schemes to make us sort of rotting potato type money.

23:59And I'll stop there, thank you. Thank you very much.