Inflation: The Problems It Creates and the Policies It Requires by Arthur M. Okun, Henry H. Fowler, and Milton Gilbert

This book is a transcription of a lecture series on inflation given at New York University back in 1969 by speakers Arthur Okun, Henry Fowler and Milton Gilbert. These three men, all important "experts" in their day on managing the economy, and all speaking with great confidence in the correctness of their policy prescriptions, had no idea how wrong they would be--about everything.

As a result, this book indirectly teaches humility, and it once again teaches how incredibly useful it is to read books outside of the time period in which they were written. Each speaker holds forth on various orthodox economic ideas of that era: presumed trade-offs between inflation and unemployment, how to "fine-tune" the economy, and (most hilariously) the critical importance of gold as the foundation of the international monetary system. 

Today, we can look back on these confidently-given speeches with rich irony, knowing that in less than a year, the 1970s would dunk on all three speakers' faces in every possible way. These guys had no idea what was coming. No clue.

We'd see an entire decade arrive with inflation at levels far beyond the conception of these "experts"--and certainly far beyond their powers to "fine-tune" it away. We'd see stagflation, something orthodox economists said couldn't exist. And we'd see Nixon peremptorily take the US off the gold standard, making the third speech (by Milton Gilbert, who was advising the Bank for International Settlements at the time), laughably irrelevant nearly the moment the ink dried on this book's pages.

At first one can't help but feel a little sorry for these gentlemen, as their aggregate wrongness is captured here in print, for everyone to see, forever. But then, after a bit of thought, another feeling creeps over the reader. One realizes that, despite their astounding wrongness, and a full decade of economic suffering and malaise that followed, these gentlemen experienced absolutely none of the downside of their wildly incorrect policies. This is a classic skin-in-the-game problem: they make the mistakes, but the rest of us pay the price. These guys misdirected the economic activity of millions upon millions of people, but yet still enjoyed all the perks of being powerful, well-paid bureaucrats. They still got their invites to speak at important business schools, and there was certainly never any threat to their (inflation-adjusted!) paychecks from their university and think tank employers.

We readers suddenly stop feeling quite so sorry for them. And that new feeling creeping over us? It is the feeling of being violated.

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[This essay has already run on too long, so please feel free to stop reading here! What follows is mostly me heaping more abuse on each of these speakers.]

On to the speeches themselves, which are uneven in quality. The first speech is worth reading, as Arthur Okun discusses the odd semantics of inflation, questioning, reasonably, why inflation rates of 2% or lower are seen as essentially non-inflationary, while rates of 3% or higher we actually call "inflation"? Okun then goes on to discuss various effects of inflation, and policymakers like himself think they can do to "cure" inflation. This speech is also notable for Okun's relatively famous "sharpies and suckers" discussion: Okun argues that people either arrange their circumstances to benefit from (or at least keep up with) inflation, or they slowly get eaten alive by it.

The reader can't help but see how calling 2% inflation "not inflation" is just one of a long list of rhetorical dishonesties used in this domain (note that this isn't what Okun argues, he is just pointing out everybody else's semantics). It's no wonder that the vast majority of people fail to see how inflation subtly destroys their savings and labor value over time. Until it's too late. Which brings us to the "sharpies/suckers" discussion, which shows the nature of inflation's long-term wealth transfer, and gives all of us a helpful mental model on how to protect our family's financial situation from today's inflation. 

A final criticism. Okun never mentions the much, much larger wealth transfer resulting from inflation: from the people to the state. It's shocking that Okun never says a word about this. But then again, maybe it's not.

The second speech is absolutely not worth reading. It is largely gobbledygook, although it teaches humility, again unintentionally. In it, Henry Fowler, Treasury Secretary under Lyndon Johnson, drones on about all sorts of meaningless minutia about what happened in the economy while he at the Treasury. He then complains, repeatedly, that the legislative branch didn't have the courage to pass the policy measures (mostly they were tax hikes) that he wanted at the time. The irony here is in the epistemic arrogance: this economist "knew" that a certain policy decision would be the right one, and he knew it so confidently that our government's separation of powers should submit to it.

Fowler also offers several other shockingly dangerous policy ideas. The worst and most laughable is his idea to give the Executive Branch the power to make rapid changes to tax rates whenever necessary, without the approval of Congress. He offers this atrocious idea blind to all the astounding complexities this would produce for every citizen in the entire private sector! Only an economist who has never run a business in his life could possibly recommend something like this.

For the bulk of the rest of his speech, Fowler pats himself on the back for all the brilliant policy decisions in 1968 that he claims reined in inflation in 1969 and 1970--clueless of course that the coming decade would produce some of the worst inflation in United States history. It's hard to believe guys like this actually go around thinking they can "fine-tune" our economy.

The third speech is the most unintentionally instructive of the three, and thus the most important to read, as it shows how catastrophically wrong "experts" can be. Milton Gilbert was an advisor to the Bank for International Settlements (the BIS, until recently run by the famously hungry Agustin Carstens). It is a long defense of the alleged sustainability and perfection of the original Bretton Woods currency system, linking the US dollar to gold. The speaker repeatedly claims how robust the system is and how it doesn't need any reforms, fully unaware that within a matter of months the system would be completely vaporized as Nixon took the US dollar off of gold convertibility. 

Remember: this guy was on the inside. He was an expert on the gold standard! When you're inside a system and that system pays your salary, you will be blind to the collapse of that system. 

One final thought. Weirdly, the main source of inflation, nation-state driven monetary debasement, isn't mentioned at all by any of these economists. After all this discussion--on raising or cutting interest rates and taxes, balancing inflation with unemployment, fine-tuning the economy--there is no mention at all of the systematic debasement of our money, something our government does, maliciously and mendaciously, all the time. If you can't--or won't--name the real cause, how can you grapple with the problem at all?

[Readers, what follows are my notes and quotes from the text: I include them to help me better remember what I read. As always, feel free to skim or skip.]

Notes:

Foreword, by Abraham L. Gitlow, dean of NYU's School of Commerce

vff Gitlow here describes what the Moskowitz lecture series is all about, what this year's topic is, and gives pretty nauseatingly non-critical summaries of each speaker's talk, as well as quick summaries of each of the responses from NYU's professors to each talk. [Don't worry: the criticisms are coming...]

First lecture: "Inflation: The Problems and Prospects Before Us" by Arthur M. Okun, Senior Fellow, Brookings Institution

3 [Nice lead paragraph here] "Like the weather, inflation is a lot easier to talk about than to do something about. My former colleague Henry Fowler and I can testify to that from personal experience. I welcome the comfortable position here on the sidelines. I wish I had better answers to the big questions about inflation. But as a private citizen I enjoy kicking them around even when I can't answer them. And perhaps I can contribute to your education by showing why easy answers are likely to be wrong answers."

3ff {The author starts out by defining inflation, and right away it's fascinating to see his strikingly propagandistic definition}: he talks about how inflation has been virtually constant since the 1930s (this speech dates from 1969) but then says the definition of "inflation" in "our general usage, is a condition of significantly or substantially rising prices." Discussion hero of brief periods where both the CPI and the GNP deflator declined, see 1938, 1939, 1949 and 1955. More details here that inflation rising less than 1.75% would be thought of as "non-inflationary" and 2.75% or higher would be thought of as inflationary by American standards anything close to 3% a year "is inflation." [Is this reasonable? By then we'd already all been conditioned to see 1-ish to 2-ish% inflation at "not inflation at all"? Recall that at any growth rate, the line eventually goes vertical, it's just a matter of time...]

5 "The agreement on the semantics of inflation is understandable. The acceptance of rates of price increase up to 1.75 per cent is, in part, a compromise with realism. For the postwar period, even a very weak economy has met a slow advance of crisis at a rate of more than one per cent. [Even in 1969 they'd fully normalized inflation: have it is seen by academics and economics as "realism"; they either aren't aware of or aren't willing to call out any systematized debasement process.]

6 Comments here on when inflation is a 3%, it causes enough of an impact for people to hedge against it or speculate on it; it becomes a factor in business decision making, as well as a source of uncertainty to borrowers and lenders. "Thus inflation is a situation in which price is rise rapidly enough to become an important influence on economic welfare and decision making. Please don't press me exactly on where to draw the boundary line in the no man's land between 1.75 and 2.75 per cent." [I would love to experience a mere 2.75% increase in my health insurance premiums!]

7 Comments on the causes and cures of inflation: "The anonymous author who first expressed the cause of inflation as too much money chasing too few goods still holds the prize for the best simple-minded truth on the subject. When the dollar value of what the nation is trying to spend exceeds the value of our capacity output, prices are bid up." On inflation caused by private demand in the late 1940s, versus Korean and Vietnam inflations due to Federal reserve "stimulus." Also comments on how fiscal or monetary policy can head off inflation.

8 "The basic cure for inflation is to remove or offset its cause: Cut aggregate demand by fiscal and or monetary policy sufficiently so that money spending will no longer exceed the value of goods." [Again these guys are stuck in the water and cannot see it! How about stopping the money-printing and steady debasement that comes from steadily expanding the money supply? It's interesting how academics can use words and names for things ("cut aggregate demand") and sound intelligent, but in reality they over-complexify a very simple situation.]

8ff Comments on how there's a lag where prices keep increasing even after "the accelerator is released and a shift to the brakes is accomplished" prices still rise. "Apart from the last, however, inflation is easy to cure. Every economist knows a sure and completely reliable remedy. If fiscal-monetary policy is set so tight as to create a recession, we can be assured of price stability. When markets are exceedingly weak, no businessman will dare raise his prices for fear of losing his markets, and no workers--organized or unorganized--will demand significant wage increases for fear of losing their jobs. The problem of curing inflation is difficult and challenging only because the nation will not take this decapitation cure for the headache of rising prices. [Again, interesting language here.] We are concerned about employment, production, consumer living standards, and business investment for economic growth. It is the conflict of these objectives with the objective of price stability that gives the economist an opportunity to write papers. It also gives the economist the obligation of telling the nation a most unhappy fact of life: if the American public insists on a better price performance than it got in 1969, it must accept some extra unemployment and some sacrifice of output and real income." [The entire 19th century disagrees with you: but if you wanted to architect a system that accepted inflation, it would be savvy to have your economics professors persuade you that these trade-offs exist and there's nothing that can be done about them.] In the following pages the other goes through various pseudo-precise calculations on loss and economic activity loss in income the unemployment they would result etc.

12 "What do we get by achieving price stability?" Comments here on the balance of payments position, and comments about how the trade surplus went from $5 billion in 1965 to under $1 billion in 1968 [note that in the modern era we have a tremendously negative balance of payments/trade deficit]: "The composition of U.S. trade is such that our price performance must be better than that of our trading partners if we are merely to hold our own. To be sure, the major deterioration in our trade position in recent years has not hurt the world role of the dollar." [You can see the beginnings of the de-industrialization of the US here, where we print dollars that the rest of the world (at least up until now) has wanted to hold: we buy the world's stuff and they get paid in dollars.]

14 Comments on income effects and who gets hurt and who gains; and how difficult it can be to tell who gains and who gets hurt; the retired aged are income losers as most pension plans don't have an escalator provision, social security benefits had a one-time increase of 13% by legislation in 1968 [back then I guess they didn't have automatic COLA escalators in Social Security either], but even these one-off increases weren't enough to keep up with the inflation rate.

15 Comments here on looking at those earning incomes; on a subtlety that happens when you think about increases in your income after tax vs pretax: even if your gross/pretax income keeps pace with prices, your after-tax income lags inflation.

16ff Those who benefit from inflation are those who gain from the availability of more or steadier jobs; comments here on people whose wages stayed relatively the same or did the same kind of work "have generally been squeezed"; the author talks about how there is discontent in certain quadrants of the labor market as "higher prices have raised money incomes in a haphazard, seemingly arbitrary way. "Such a reshuffling real incomes is, in the view of most Americans, unjust..." [The author doesn't say it this way but this is just because certain people have price elasticity in the services they offer just like certain products have high price elasticity: a person can either "raise prices" for their labor, or they can't. Thus if you are living in a period where there's inflation and the price of everything goes up, you need to be doing things such that you can increase your income ("raise prices") as well.]

17ff Also comments on how it isn't clear to what extent inflation is a driver of increased incomes. "When the man of the house brings home an 8 per cent wage increase, he and his wife are confident that he earned and deserved that raise." But of course that wage might have occurred in part or fully due to inflation alone. Also comments here on how inflation is "divisive and disruptive" because most people feel like they're not keeping up with inflation. [I am increasingly coming around to the opinion that nation states want inflation because of this effect: a weakened, distracted and disrupted populace is much easier to control.]

19 Comments here on the "balance sheet effects" of inflation, which the author calls "considerably more serious": it deprives people "of the opportunity to save in a form that gives them a predictable command over future consumption goods." We don't know how much prices are going to rise for different types of items or services in the future we can't even tell that the price rise will be steadily at any certain rate. Also: "The opportunity for safe saving is lost in a period of sizable and unpredictable price increases." Corporate equities and real estate are not good anti-inflationary hedges on a year by year basis, they may outpace the price level on average in the long run "but only with wide swings and great uncertainty." People who want to save in reasonably safe assets "are not accommodated during inflation" thus creating "an unhappy division of savers into 'sharpies' and 'suckers,' if I may borrow some non-technical terminology." [!!] [A basic takeaway here is "don't be a sucker."]

21 Interesting comments here on how some borrowers don't really benefit from inflation either, even though they're paying back their debt with inflated/less valuable future dollars; the author gives an example of a mayor or a governor who can't really celebrate "the decline of real value" of a city or state's large outstanding debt. More comments here on how inflation results in a transfer of wealth between sharpies and suckers, and this seems to harm the aged, as well as middle- and upper-middle-class conservative savers whose liquid assets are not offset by a large mortgage for example. [Inflation creates a K-shaped economy: it enriches asset owners and impoverishes everyone else.]

23 "Implicitly or explicitly, the Government is obliged to set some ceiling on a tolerable rate of price increase, and it will be guided by the general agreement I noted at the outset: we tolerate rates of price increase of at least 1.5 per cent, while those approaching 3 per cent or more are considered intolerable."

24 On the fatal flaw of proposals to help us live with inflation: "Tying money incomes to cost-of-living escalators, selling cost-of-living bonds, etc., might well either speed up inflation or jeopardize the bonus of output and employment."

25 Other structural policies for inflation: the main line of defense is fiscal/monetary policies, but then also things like the intensity of business competition, the mobility of resources and their adaptability to alternative uses. The author gives an example of the government breaking bottlenecks in particular industries like construction and healthcare, or reversing policies which add to costs and prices in given industries. The author gives examples here like government-imposed floors on transport rates or quotas on oil imports or reduction in farm subsidies. [All of these things would be of course practically impossible given... politics.]

26 [Finally, 26 pages into his speech he gives the main program that he wants to see, and it's a doozy]: "Finally, a comprehensive program to achieve non-inflationary prosperity should include a major effort to enlist the voluntary cooperation of large firms and labor unions with substantial market power. ... management and labor have a good deal of discretion overprices and wages. How they exercise that discretion can be influenced by the attitudes of the Federal Government. ..we need a new program of voluntary restraint." [Huh: predicating your policy recommendations on the "restraint" of big business. Good luck!] 

26ff [Also note this interesting quote]: "When at the start of the Nixon administration, the president expressed his strong opposition to the use of the jawbone, his words were interpreted as a declaration of Open season for price and wage increases. That judgment was reflected in the prices of many concentrated industries."  The author then goes through an extended metaphor of speed limits, asking people to "drive carefully" while having a passing lane; and thus some speeders "will escape the eyes of the traffic patrol." "Despite their imperfections, posted speed limits on the highway serve the nation well and so can speed limits on prices and wages." [Good lord, this guy is highly respected economist?] 

29 Comments here on how he is against mandatory controls on prices and wages because it ensnares the market in bureaucratic red tape, they "lead to bare shelves" and aren't effective in holding down prices anyway, even though they're popular politically. "Although controls may be popular when they are not in effect, the housewife would find that she dislike their consequences even more than rising prices. Controls were never seriously regarded as a meaningful alternative during the Johnson administration; and they aren't, I am sure, any more popular in the Nixon administration." [The irony here is this guy was completely wrong--he got it backwards--as Nixon actually froze wages and prices briefly in 1971.]

30ff Comments here on being gradual with policy shifts to control inflation; in other words, accepting slowly declining inflation in return for not putting the economy into a recession; the author claims that the costs of a recession are far greater than modest inflation. Also the author enjoys using the analogy of "going on a diet" as a metaphor for accepting anti-inflation policies: overeating is fun and a diet brings few results in the short run, thus it's easy to procrastinate; also there's no clear boundary line between normal weight and overweight but the longer we overindulge and procrastinate the more serious the risk becomes. "Once we get the message, we are tempted to go to the other extreme and adopt a starvation diet. The choices are never easy and they demand a great deal of maturity. We haven't yet demonstrated whether we have the maturity to adopt a sensible diet as a nation." [I think I'd add here that the obesity in America is a metaphor for our tendency to overindulge and overdo it in all domains, including in our household financial irresponsibility at the individual level and our fiscal and monetary irresponsibility at the nation-state level.]

32ff Comments here on how much of an economic slowdown is required (and for how long) to "cure" a bout of inflation. [Again this seems to me to be completely the wrong question: the way you "cure" inflation is by not debasing the money, not by debasing the money/money-printing and then trying to debate how much of a slowdown you have to impose to fix the effects of the monetary debasement you just engaged in.] Examples here where inflation was reduced without a recession or any increase in unemployment in 1966-1967. Another example given here of tax increases imposed in 1968 that reduced savings and consumer activity: this then reduced the money supply; but then inflation didn't go down in 1969 as the author expected. [Other examples given here as well, but what's sad is the author is basically rearranging pencils on his desk: he's arguing about minor shifts in inflation in the late 1960s when the US economy was about to enter a decade of the worst inflation of the entire 20th century. None of this stuff was going to even move the needle.]

37 "We sometimes hear the contention that nothing short of recession will decelerate prices. That assertion rests on the view that inflationary psychology is so deeply rooted that it can be shaken out only by an upheaval in the economic environment. I have trouble following that argument, and I suspect immodestly that the fault lies in the argument rather than in me. Economists know pitifully little about how price expectations are formed and how they influence other economic decisions." [Inflation primarily comes from monetary debasement, but our government and its economists can cover up this facts with meta-discussions about "price expectations" or how much unemployment we should endure to "fix" inflation. If we had genuinely hard money, these meta-discussions wouldn't be necessary at all.]

39ff Famous last words right here from this author: "The American economy has already demonstrated in the sixties its capacity to support non-inflationary prosperity with an unemployment rate no higher than 4.5 per cent." [Once again, the irony was that within a matter of weeks a new decade would begin which would feature precisely the opposite: tremendous, intractable inflation for many years.]

42 More famous last words here from the author: "I have been told that, in their planning models, some business and financial executives are projecting an average annual rate of price increase of 4 per cent for the whole decade of the 1970s. I would remind them of the long-term forecasts made early in the sixties which envisioned years and years of continued slow growth, sluggishness, rising unemployment, terrifying consequences of automation, stagnant investment, and sagging profits. But the nation woke up to the costs of a slack economy; and we grew and grew--sometimes not wisely, but all too well." [This guy is wrong with his own predictions, but worse, he's wrong in his predictions of how others' predictions will be wrong. And then, to top it all off, he finishes off his speech with something even more wrong]: "Just as the great victory of economic policy and performance of the sixties was to establish prosperity as the normal state of affairs in the American economy, I would predict that the seventies will witness a tolerable reconciliation of that prosperity with  reasonable price stability." [Predictions are difficult, especially about the future.]

43ff Finally the author offers an appendix describing the so-called "controlled experiment of 1969" "where Nixon made clear his intention not to attempt to influence particular price and wage decisions in the private economy." The author claims here that the fact that Nixon did not try to jawbone prices caused somewhere between a half a percent and a full percent of extra inflation in 1969, and he offers a list of commodity and product prices to "show" this. [The lack of logical rigor here is astounding: the idea he can arrive at such a conclusion based on this short list of prices, and compare it (somehow?) to a counterfactual reality that never happened, it's all hilariously unrigorous. This guy was an important economic policy maker???]

48ff The author attempts to make the [rather circular!] argument that if the president had only jawboned prices lower they would have been lower; but then he contradicts himself by quoting another economist who argues that even if you can jawbone prices down in some areas of the economy, it will simply divert inflationary pressure elsewhere, making other prices or wages rise more--because those things can go up in price rather than the things being jawboned down! The author waves this argument away with a pseudo-argument about how there is a lack of price inelasticity in most of these products, thus lower prices would mean more demand, which would means fewer dollars left over to spend on other things. [This is an argument that only a pointy-headed economist could make.] The author returns to his belief that the President should jawbone prices lower.

Second Lecture: Fiscal Policy and Inflation by Henry H. Fowler, General Partner, Goldman Sachs

57ff "The discussion of the subject given me--fiscal policy and inflation [so he was given this topic?] will primarily reflect observations of one formally concerned as Secretary of the Treasury with the management and operation of fiscal affairs of the Federal Government... My discussion will pertain more to the real world, as it is, in contrast to the theoretical--what ought to be! It must reflect the viewpoint of the manager or operator, rather than the theorist."

58ff This talk is staring out with a lot of "on the one hand/on the other hand" comments here about using economists, about the difficulties of forecasting, etc.

59ff Broad comments here on fiscal policy and inflation; the author hopes to avoid any debate between economists who like to "fine-tune" the economy and "monetarists" who stress monetary policy and the money supply; rather he believes that flexible fiscal and monetary policy have to be used in coordination, especially when "large doses of stimulus or restraint are necessary to deal with recession or long-term stagnation on the one hand or serious inflation on the other." On the idea that fiscal and monetary policy coordination will be the mutually reinforcing, thus minimizing cancellation of one action by the other. [Has there ever been a Treasury Secretary who didn't think he should tinker with the economy, and knew he could do so successfully?]

62 The speaker justifies tinkering with the economy to drive price stability and control inflation and unemployment, and he even says that it is prescribed in law, citing the Employment Act of 1946: "The Congress hereby declares that it is the continued policy and responsibility of the Federal Government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy to promote maximum employment, production and purchasing power." Comments here quoting Walter Heller and his "valuable" book New Dimensions of Political Economy, saying that when the economy approaches full employment "targets have to be defined more sharply... the line between expansion and inflation becomes thinner" and "the premium on quantitative scientific knowledge becomes far greater." [Once again, it's worth looking at the 1970s and how out of control the economy became to get a good sense that these guys have very little idea of what they're doing. Looking at these talks through the lens of what happened immediately after makes all of this talk seem like a charade, like some kind of bad joke.]

63 "...we shall not be drawn into the neverending debate between economists and operators and, indeed other economists as to the merits of fine-tuning."

63ff On a shift in policy goals in the 1960 towards promoting full employment, since at the beginning of the 1960s "our country was mired in its fourth postwar recession." [This is vaguely worded but I think he means the fourth recession after WWII: there were recessions in 1945, 1948-49, 1953-1954 and 1957-58.]

65 Comments here about US gold reserves declining and concerns about the future of the dollar in the 1960s: "This is neither the time nor place to indulge in an historical resume--much as I might enjoy it, having been heavily involved as under Secretary of the Treasury from January 1961 through April 1964--in the emergence of fiscal policy in an activist, bold, innovative role in response to this earlier national emphasis on adequate economic growth and full employment." Vague comments here on a "triumph of modern fiscal policy." [It might be interesting to read about what happened in the 1960s in terms of monetary history; I need to learn more about what actually happened on the fiscal and monetary front during this time, but one thing Kennedy did was cut top marginal tax rates from 91% (!!!) to 70%.] The author argues that the economic success story of the first half of the '60s was where fiscal policy made a contribution to the simultaneous achievement of healthy growth, nearly full employment and price stability while also whittling down the trade deficit. Thus "it holds out hope" that these things can all be done simultaneously. [You can also see the logic error here--again astounding for an ostensibly intelligent man but de rigueur for an epistemically overconfident man: just because something happened doesn't mean that you caused it with your "fiscal policy," and further, this doesn't mean you can recreate the same phenomena via tinkering in any other era. But to paraphrase the old saying: butchers butcher, surgeons cut, and economists love to tinker with the economy. The epistemic arrogance from these guys reminds me of David Halberstam's wonderful book The Best and the Brightest. These guys thought they could do anything.]

67ff Now on to a discussion of the Vietnam War: first, it's interesting to see the author's euphemistic description of the conflict as he calling it "The emergence of large-scale hostilities in Southeast Asia in 1965"; citing Vietnam along with the defense build-up and LBJ's Great Society programs, basically this amounted to increased government spending on all fronts, and this meant that inflationary pressures returned. [If you want to have price stability and economic growth, we could consider not starting wars all over the world...] 

69ff Comments here on President Johnson's "courage" to raise taxes in 1968 to try to combat inflation; other comments here about various attempts at fiscal restraint a couple of years earlier in 1966 which were blocked by Congress. [At this point this speaker is literally all over the place, he's getting really lost in the weeds here, and I can't imagine this being a speech that anybody could digest in real time.]

71 An unintentionally interesting passage here where the speaker blames a delay in passing a 10% income tax surcharge (which Johnson wanted) from 1967 into 1968, saying this delay "permitted the inflationary pressures to continue to develop." Then the author asks, "What are the feelings of the manager or operator of the nation's fiscal affairs when confronted by a legislative body unwilling to take necessary and timely fiscal action to prevent a threatened inflation?" [What's unintentionally interesting here is the pathological arrogance: according to this tinkerer, we should just ignore any legislative process--instead we should automatically approve what economists want to do, because they know that this will lead to the economic results they want.]

75ff Finally he gets to addressing the topic [just like speech number one, this speaker also is taking too long to get to the point]: "This brings us to the topic of the day in its contemporary rather than historical context--the role of fiscal policy in dealing with an inflationary surge of prices which has unhappily come to pass and become somewhat embedded in the system." Comments here on how the objective has to be to reduce aggregate demand before inflationary momentum is underway and before inflationary psychology impacts private investment and consumption. [This is again pretty shockingly epistemically arrogant: we have to somehow read the mind of the citizens of the United States and slam on the brakes before they start to expect inflation.]

79ff Comments here on sources of fiscal policy influence on inflation. [Right away we see how an economic ignores the primary (and obvious) monetary debasement component of inflation, instead using a mouthful of "priestly" economic nomenclature]: "Inflation is the result of both aggregate demand that strains or exceeds the economy's then readily available potential and the cost push elements which result in wages chasing prices up and prices chasing wages, i.e., the wage price spiral." [If you can't--or won't--name the real cause, how can you grapple with the problem at all?]

82 Useless and poorly-written comments here on needing better economic forecasting: "What might be called normative forecasting, i.e., forecasting which reflects more the policy makers desire than a careful assessment of private sector responses to economic policy, must be avoided."

83 On fiscal policy driving aggregate demand based on changing government spending; but also how fiscal policy can have a role in growing aggregate supply with capital investment incentives like adjusting tax rates or other measures that can raise the productivity or and or mobility of the labor force; the author cites early 1960s tax incentives for capital investment which he thinks minimized bottlenecks in the economy. Note also the delusional comments here on using "job training"--something that governments demonstrated their lack of competence at even in the 1960s when things moved a lot slower. Also note the  comments here on using selective fiscal measures to deal with "sectorial inflation." [Holy cow, these guys thought they could predict things on an industry sector basis and produce and pass tax policy in time to achieve a reduction in inflation in that sector?]

86 Note this fascinating offhand remark here on using government "debt management" as an economic policy tool: "There are many other options, particularly if antifiscal limitations such as the 4.25 per cent ceiling on longer-term paper and the debt limit are withdrawn and Treasury debt management flexibility fully restored." [The sentence blows my mind: it sounds like an admission that the government was practicing fiscal repression in the late sixties and basically had "fixed" interest rates at an artificially low rate. The author just drops the sentence without any context at all, it sounds like they just take for granted massively interventionist behaviors like this.]

87 More priestly economic language here: "Of course, the first line of defense against inflation must be fiscal and monetary policies that prevent excessive pressures of demand on productive capacity." [No, "the first line of defense against inflation" is to stop debasing the money.]

87ff The author describes various activities he did while working at the Treasury Department that were "outside classical fiscal boundaries": he gives 12 different examples, including improving labor mobility, minimizing work stoppages, manpower retraining, regulation of industries, etc. Also a discussion here of a cabinet committee created by President Johnson in 1968: The Cabinet Committee on Price Stability, which was supposed to work with business and labor "to seek ideas and initiatives" to combat inflation. [For the gabillionth time, there's only one thing that you need to do to stop inflation, but your nation state wants you to think that there's lots of things that "need" to be done, and that the nation-state should of course do those things... while it debases your money.]

90ff "Some near term issues and long-term problems and conclusions on fiscal policy and inflation": the author argues that the near-term priorities should be: to preserve the fiscal restraint started in June 1968; that the budget surplus should be increased; for Nixon to extend "the surtax" [this was a surcharge on income taxes that basically added 10% to everybody's final tax bill, it was passed by LBJ in 1968 to fund the Vietnam War; and this guy is calling for Nixon to extent it at half that rate, or 5%] and not cut taxes for the years 1970 to 1972; the author also agrees with Nixon's call on labor leadership to base their wage demands on an assumption of price stability. [Jawboning again.]

94ff The speaker then criticizes the Nixon Administration for not going far enough with fiscal restraint, with their refusal to set "guidelines" for wages and prices; also note the savvy "assume the sale" rhetoric here, where the author claims "the government has some responsibility in the fight on inflation" and "That responsibility includes the encouragement, promotion, and development of practices in private decision making on wages and prices that are consistent with the national interest... This is not a case of 'either-or.' The nation needs both appropriate fiscal and monetary policies, which are the primary and indispensable tools for combating inflation, and restraint and private decision making on wages and prices." [It's very interesting to see how you can have your central bank create an inflation problem by debasing your money, but then your leaders will use that deliberately-created problem as a justification for directing your government doing whatever it wants to "stop" that problem. Very, very fascinating rhetoric here, justifying the use of an entire suite of control mechanisms.]

96ff Various justifications here for government involvement in wages and prices; note the euphemism "voluntary cooperation" that the author uses here for "making responsible price and wage decisions"; the other quotes his own cabinet committee describing how the role is "unpleasant" but must be recognized in future planning. Also note this quote: "Mutual short-term sacrifices are needed to protect the great long-term interest of business, labor, and all Americans and non-inflationary prosperity." [One could always ask any bureaucrat/Cantillon insider who says something like this, "How about you make a short-term sacrifice first and do your job for a non-inflation adjusted wage?" Or better still how about not debasing the money so that none of this is necessary at all?]

99ff The author criticizes the idea of reducing personal income tax rates, claiming that tax reductions also drive inflation. [Note that if we look at the 1980s and the mother of all tax cuts that happened under the Reagan Administration, combined with Paul Volcker drastically compressing the money supply and hiking short term interest rates, what resulted was some two decades of lower than normal inflation. Thus it is not clear in any way that reducing taxes causes inflation--or the reverse: that increasing taxes reduces inflation! In fact, if you think about it, an increase in your taxes is literally a type of inflation: the "price" the citizen has to pay his government goes up!]

101ff Off-topic discussion here on improving the fiscal processes of government, the speaker talks about how the federal government spending exceeds its own estimates every year, how the government should have much more flexibility in setting tax rates to coordinate fiscal policy, the underlying idea here is to balance receipts with expenditures. [Only a government bureaucrat could fail to imagine the impossible complexities for everyone if a nation state could change tax rates and rules constantly throughout the course of a year. Absolute failure to see second-order consequences here.]

106ff Comparing the distributed and limited powers of the US Treasury Department to the centralized, greater powers of the UK's Chancellor of the Exchequer [centralista will always want to centralize], basically under the US Constitution, fiscal responsibility is divided up between executive and legislative branches, although the final authority is the Congress; the author argues wants to change the US system, and he uses the euphemism "minimizing the fragmentation of authority for fiscal policy in the Congress" with several pages of his justifications for it here.

114ff The speaker then argues for yet another policy goal, to fix Congressional procedures that coordinate and authorize appropriate expenditures to reflect specific policy decisions, followed by three pages of discussion to justify it. [The section is largely content-free.]

118ff Then the third policy goal: to delegate to the executive branch temporary authority to make quick and positive adjustments in tax rates, although with Congressional authority to set these changes aside; once again a few pages here of justification; the author clearly has never run a business, as he is clueless all over again about how the entire business sector would be thrown for a loop at any time in order to comply with any kind of last minute, no-notice tax alterations. You can't just change these in the short run. [It is astounding that a guy this blind to the effects of his own policy goals could possibly make it to such a high place in government. He ran the Treasury for goodness sake!]

Third Lecture: The Discipline of the Balance of Payments and the Design of the International Monetary System by Milton Gilbert, Economic Advisor, Bank for International Settlements

[Note Agustin Carstens, on the right in the meme below, who led the BIS until 2025, and who was infamous for his aggressive support of fully surveillable central bank digital currencies.]

Never trust when your government gets to mark its own report card

127ff [It must be noted here that much of this discussion of "design" of the international monetary system became completely irrelevant, literally within a matter of months after this speech was given, as Nixon took the US government off the gold standard. It's yet another example of the wrong-way Corrigan nature of these speakers. Incredible.] Comments here on the development of Special Drawing Rights; on growth of reserves across the Group of Ten major economies; on the tug of war between creditor countries and the United States; on maintaining gold's [soon to be totally delinked!] "parity" with the dollar as the US was carrying a persistent trade deficit and had deteriorating gold reserves without any program to adjust things. "The USA's main effort was to finance the deficit by borrowing abroad instead of by losing gold."

128 "My purpose here will be to explain why I consider the maintenance of an active role for gold in the system to be in the interests of the United States and the world." [Holy cow that is hilarious! Just minutes before the US took itself permanently off the gold standard.]

129ff Discussion of the Bretton Woods currency exchange system and the establishment of the IMF; on the conflict of interest of creditor countries like the US and deficit countries [basically everybody else, but primarily the European powers]; on how the Keynes "Bancor" plan was contrary to the interest of the United States because surplus countries experienced penalties under the system. "Instead, the United States insisted on the White plan" which fixed quotas on how much each member can borrow or lend to the IMF.

131 Note this quote: "A sovereign state cannot be prevented from printing all the domestic money it sets its mind to, and the Bretton Woods experts did not imagine that their safeguards would necessarily be effective in this sense."

131ff Chen comments on the balance of payments themselves where a country in deficit could ignore any discipline as long as it could rely on its own reserves, but if it wanted to draw on the IMF "it had to show a convincing program for correcting its deficit." The central idea here is that any country which was in disequilibrium should quickly adjust downward value of its currency, ottherwise it would have to resort to exchange controls. [This is still true even in a non-gold based international currency exchange system.]

133ff In general most disequilibria have been corrected probably by changes in currency values, but note the exceptions of the US and the UK: they were running excessive monetary debt; comments on the UK Sterling devaluation of 1949 and 1967; the author cites this history being described in the 38th BIS Annual Report for the years 1967-68 [Might be interesting to dig up this report and read it for perhaps a roadmap for the USA in the coming years]. "Here I will comment only on the failure of discipline to operate." The speaker then goes into a discussion of the slow growth of the UK in the 1960s and their attempt to stimulate the economy with spending, they financed their deficit spending with borrowing external reserves from abroad; the speaker says here that the UK should have had surplus reserves at the bottom of an economic cycle, but by the summer of 1964 the UK was in substantial reserves deficit, and so it negotiated a $1 billion standby loan with the IMF [Jeez, just like a developing economy]; the following year Labour took office and the deficit then rose to $2 billion dollars, "and the storm broke on the the exchange market."

135ff "How did the country manage until November 1967 to escape a forced adjustment through the discipline of the balance of payments?" The speaker cites how the US thought it had a stake in shoring up the exchange parity of Sterling [I'm guessing here because the US thought this would also help stabilize gold's parity with the dollar], making dollars available to the bank of England, but this increase the relative oversupply of dollars in the world. "What the United Kingdom got out of by-passing Bretton Woods discipline was a large loss of foreign assets and an even larger volume of short and intermediate term monetary debt. A chastening experience!"

136 "The case of the United States is more complicated. Unlike sterling or the French franc, which are held as reserves by only a limited group of countries, the dollar is the general reserve and intervention currency of the system; moreover its convertibility is maintained in terms of gold." [Not for long, sucker! Recall the speech was given in 1969 and the US took itself off the gold standard in 1971. This guy was supposed to be on the inside, and he had no idea, no clue whatsoever, what was coming.] 

136ff Comments here [largely pointless comments based on what history was about to do to "the international gold standard"] on how to correct a disequilibrium in the balance of payments: the US would reduce its parity price with gold--which would be a competitive devaluation--and thus opposed by the IMF. The US is the residual buyer and seller of gold in the system. Long discussion here of what other countries would do as the dollar price of gold changes [again pointless because the dollar was about to be delinked totally from gold in a matter of months]. Note also the self-congratulatory comments here from the speaker where he refers to "The high standard of economic thinking of the negotiators at Bretton Woods..."

139-140 Interesting offhand mention here of a mistake implicit in economic assumptions of this gold-linked exchange system using: that it used "closed economy" assumptions of Keynesian equations: the author quickly excuses Keynes here, saying "it is surely an error Keynes never made in discussing policy for the real world." [Holy crap! Economics really is a religion when it comes to Keynesian doctrine.]

141ff Comments on the "shortage of monetary gold" [what this really means is "an excess of dollars" because they are printing more dollars than would be acceptable if the US really stuck to the gold peg, which they pretty much mostly didn't] and also on the decline in US gold reserves over the past two decades [as other nations (mostly France as I've come to learn) exchanged their paper dollars for that gold per the Bretton Woods accords]; the author argues this means that there's a logical case for raising the price of gold. "It is simply that the shortage of new gold is what is wrong with the system and that raising the price is the indicated adjustment process." [Here, although it's not said, "raising the price of gold" really means "cutting the price of the dollar" in gold terms. Looking back on this from years later, you can see the entire system was unsustainable: nobody wanted paper dollars from a country that was relentlessly debasing its money! Everybody wanted to exchange their dollars (that they got for selling things to the US) for actual, real gold that can't be debased like paper money. Of course, this entire system would be thrown out the window by Nixon's 1971 delinking dollar-gold convertibility, and this began an era that, ironcially, was even more beneficial to the United States (and at the expense of all other nations) as the primary global reserve evolved into US Treasury debt; thus the USA could literally print paper and sell it to the rest of the world in exchange for stuff.]

143 Still more famous last words here with another example of where the speaker basically bottom-ticked the entire monetary system: "The [Bretton Woods] system does not need to be reformed; it is only in disequilibrium and the only need is to use its adjustment process. Nothing has happened between the time of Bretton Woods and now to make the system out of date." [Upton Sinclair's famous quote comes to mind here: "It is difficult to get a man to understand something, when his salary depends on his not understanding it."]

143ff Extended explanation of why it's important to have gold as the foundation of the international monetary system; lamentably much of this is argument by hand-waving: see for example his second bullet point: "...the fixed rate convertibility of the dollar must be to gold because there is no practical alternative." [Our boy Milton Gilbert would learn in the next year how presumptive and wrong this claim was...] 

144 [See also yet another quote in this paragraph that shows why handwaving arguments can make one dangerously blind to reality]: "...it is not evident that other monetary authorities would accept a pure dollar standard..."

145 More delusional optimism about the discipline of the United States in terms of spending, managing its currency, taking responsibility for its deficits etc: "The United States needs the discipline of gold--for itself. For other countries, the conversion of dollars to gold is the only means of demanding discipline by the United States."

147 Comments here on the campaign pledge from Kennedy in October 1960 saying that he would not raise the price of gold [again I love the euphemistic language here: what Gilbert/Kennedy really means is "would not devalue the dollar by reducing the rate at which the US will exchange dollars for gold." If you think about it, in a literal sense the phrase "Kennedy would not raise the price of gold" is sort of hilarious: it's like saying "Kennedy would not raise the price of bananas" as if the US president can just decide the price of a global product by fiat.] The author comments here on how maintaining the $35 gold price is a high priority in US policymaking even though gold at that exchange rate with dollars would be severely undervalued [meaning the dollar should be lower in value]. "The gold parity of the dollar has been put in a special category, mysteriously different from the gold parity of other currencies."

148 On the French franc devaluation in 1969, when France's President [de Gaulle] said that maintaining the currency's value would involve "unbearable sacrifices and massive unemployment." But yet in the US we somehow can get away without devaluing our currency because we could limit the conversion of dollars to gold, and also convince other countries to accept US debt instead. "This was supposedly in the interest of cooperation, but it really meant exempting the United States from the adjustment process of the Bretton Woods system. [We see here how the author considers the Bretton Woods system to be working perfectly, except for the US not following the rules of the system. We will also shortly see him commit a blatant "no true Scotsman" fallacy in order to claim the gold-based system is working just fine. Everything's fine!]

149 More handwaving here as he denies the claim that "the Bretton Woods system has already broken down" by using a no true Scotsman argument: "...the present conduct of affairs can hardly be called a system." [Thus he is arguing, fallaciously, that the Bretton Woods system would normally be working perfectly: the fact that it's not working perfectly just shows that it is not a true Bretton Woods system.]

150ff Now an extended discussion on "disadvantages of raising the official gold price" [again, this means devaluing the dollar by reducing the rate at which dollars will be exchanged for gold]: the author considers that the advantages of devaluing the dollar are much greater than the disadvantages, but is willing to go through the other side of the argument. The arguments basically are: 1) that gold serves no purpose and it's better to hold interest-bearing dollar assets instead, 2) it's better to just have flexible exchange rates; note the author cites Roy Herod in a footnote on p151 as one of the few economists who has consistently urged a rise in the gold price but not a return to the gold standard, the author was put off by his arguments because it enables too high a tolerance for inflation. [And guess what was coming in the 1970s once we went off the gold standard...]

152 Continued arguments here: "Some of the alleged disadvantages [of raising the official gold price] are too trivial to bother about, but I may comment on the following:" 

1) That it would bring about an excessive increase in total world gold reserves, and that currently there is a substantial shortage in gold reserves globally: most countries have too low a level of reserves. [This is sort of a weird circular argument because if countries devalue their currencies by definition the value of gold they hold goes higher in that currency--even though the quantity of gold remains unchanged!] 

2) That raising the gold price would unleash drastic inflationary forces worldwide; the author argues this is not plausible there's no reason at all to anticipate inflationary consequences, nothing inherent in the gold price causes general inflation. [I wonder if the inflationary forces were possibly already there, the reason there is pressure on the currencies to be devalued is reflective of that inflation.]

3) On the idea that raising the price of gold would be inequitable because 85% of the gold stock is held by the Group of Ten and Switzerland: in other words the benefit would just go to the rich countries and be extremely unfair to developing countries; the benefits would accrue to a very small numbers of holders. [The author waves this argument away, claiming "The objective of reform is rather to re-establish a viable system, capable of equilibrium," and then makes a self-contradictory argument that we could just have an international welfare program to fix this--even though the problem that we'd be fixing he denies exists.] 

4) On the argument that raising the price of gold would create expectations for further increases, or that this would be required to be done every few years. [This is quite a robust argument! But yet again the author waves it away as well saying that it depends on the assumption that there will be persistent monetary inflation worldwide in the coming years. Of course this is exactly what came to pass.]

5) Another argument he wants to dispute: that gold has a disadvantage when used for monetary purposes because it's dependent on the vagaries of gold production, or Russian gold sales, or the use of the material for jewelry or industry or private speculative demand. The author argues this away by saying that trends of gold production and industrial consumption over the past fifteen years have been very smooth--again as if this is an argument! He also makes a fully circular argument here that the fact that there's fluctuations and speculations on gold just means "that the price has been too low." [This is the kind of person they put running international monetary systems? This guy can't even see his own fallacies.] 

6) That if we have a rise in the price of gold, monetary authorities will no longer be willing to hold dollars: the author waves this argument away too, saying that US should be indifferent as to whether other countries hold dollar reserve assets or not. [Yikes. The fact that the rest of the world wants to hold dollars is central to the rake we've been taking off the entire world for decades. That the US "should be indifferent" to this is literally delusional.]

7) And then the final argument here: that the change of the dollar-gold price would break the US's pledge to maintain the $35 price, which is considered a binding pledge; the author argues here that government officials deny any change in gold parity prices up until the moment that they make the change. "In the case of any currency requiring a change in par value, it is a practical necessity for the authorities to maintain stoutly up to the moment of action that the existing parity is not in question. The authorities cannot raise doubts on the matter because the reaction in the market would be enormous shifts of funds..." [No shit, Sherlock.] See also comments here on how the authorities "feel obliged to save face as long as possible": again the author waves away this argument saying the pledge of officials is not the law of the land. [Not that we should expect countries to be honest or to always fulfill their pledges, but that doesn't mean you want to base your argument on the assumption that you should be dishonest and shouldn't consider a pledge binding.]

163ff Discussion here on Special Drawing Rights: preliminary comments here about the instability of the system [a system that he claimed was perfectly stable and needed no reform whatsoever just several pages ago]. Basically SDRs were designed to supplement and substitute for gold reserves [essentially they are supposed to be like "paper gold" inside the international monetary system, which can be exchanged for any national currency]. The author says "I have always supported" just such a reserve facility scheme, but not to the extent that it is being used today. SDRs are basically scrip, they represent something that major countries can exchange to draw on each other's currencies without fixed repayment obligations. Comments on their drawbacks: that countries may use them to postpone necessary corrective measures for example. [This brings to mind an obvious question: if we can just make up something and use it in place of gold, why use gold?]

165ff On the huge drawback that these SDRs have an absolute gold value guarantee: the author goes through three undesirable results if the dollar-gold price is raise: 1) that it is inequitable and it favors creditor countries at the expense of debtor countries who are holding SDRs that are devalued in gold terms; 2) the gold value guarantee may make countries unwilling to use them as reserves or substitute dollar assets for SDRs; the author believes that as their use is increased the credibility of the guarantee may be lessened, especially if the market price of gold rises appreciably [Weird to see the author basically advocating SDRs in a form that he thinks dollars should never take.]; 3) the US has refused to give a gold guarantee to other countries' official holdings of dollars and it's likely they wouldn't do anything similar with SDRs either.

167ff Now the speaker asks "Is the SDR scheme a full alternative to rising reserves in gold?" The author points out that gold is an asset for which there is no corresponding liability, thus when new gold is introduced into the system it produces a net increase in global gold reserves; thus for SDRs to work--even though they're not a commodity--if they're to be a true alternative to gold they must have the same effect on the system. Discussion of if they're put on an official balance of payments balance sheet what would be the "contra-item" in order to make the balance of payments balance? It would have to be some kind of receipt, or some increase in official monetary liabilities. [I guess had not even been worked out at this point.]

169ff Also citing Fritz Machlup, who wrote a monograph analyzing the SDR system but wrote a final chapter on "unfinished business" discussing some of these unsolved problems; also noteworthy that Machlup recommended the US to suspend convertibility of the dollar to gold now and forever and then have the dollar float in exchange markets. Gilbert makes a condescending remark here: "But, since this is his real solution to the basic problem of the shortage of new gold, it was surely beside the point to get overly enthusiastic about SDRs in the first place."

170ff The author still agonizes here about what would be the SDR's corresponding liability on the monetary authority's balance sheet, but then he says, "It might be consider to be like the liability incurred by the Federal Reserve when it issues a Federal Reserve bank note of one dollar--its only obiligation being to pay on demand another dollar." [Welp, maybe we might as well just use dollars then. Even though this speaker doesn't want it and thinks it won't happen, he's unknowingly saying what is about to happen: the end of gold convertibility of the dollar.]

172ff Working out how SDR transfers will be handled, will they look the same as transfers in monetary gold? [In today's era these things are just database entries. Pixels. The metaquestion to ask of course, courtesy of Lyn Alden in her wonderful book Broken Money, is "who controls the ledger?"]

175ff Now comparing SDRs, "fiduciary instruments" as the author calls them, to gold directly. A long quote here that illustrates why countries may want to hold things like gold which are not someone else's liability, especially in times of conflict: "The desire of monetary authorities to keep some proportion of their reserves in gold derives in part from the fact that it is a universally accepted asset of intrinsic value which is at the free disposal of its holder. Hence, gold meets a demand connected with national sovereignty and independence. This demand cannot be satisfied by fiduciary instruments, such as foreign exchange reserves in dollar assets, because such assets may not be available for actual use in certain political circumstances, of which war is the extreme. Similarly, this demand cannot be met by SDRs, which are likewise a fiduciary instrument. Thus, if nations continue to want to hold part of their growing reserves in gold, the shortage of new gold will remain a problem for the United States as the residual seller of gold. To state the matter abstractly: the system has two reserve assets, gold and dollars, which are not perfect substitutes for each other, so that increased holdings of one do not fully satisfy the demand for increased holdings of the other. This imbalance is not changed by adding a third reserve asset (SDRs), which is also not a full substitute for the other two. The way this question is often debated is whether dollar reserves are as good as gold reserves, or vice versa. But it is not a matter of one being better than the other, as can be seen from the fact that central banks hold both--in varying proportions according to their preferences. They are simply different and are held for different purposes--just as a private investor may hold common stocks, bonds, and real property because each fulfills a different purpose. The same is the case for SDRs. The participating countries have shown their willingness to hold them by agreeing to the scheme; but if they had been willing to take all their increase in reserves in the form of SDR credit balances, there would no have been no need to have 'holding limits' incorporated into the scheme."

176 Note the footnote on page 176 talking about conditions of war that might invalidate or cut off countries from administering SDRs or having access to them; Gilbert here refers to a work by Lucius Thompson-McCausland that supported SDRs strongly, but left this issue in a footnote; Gilbert argues that this issue is far too important to be left in a footnote, and that sovereign nations cannot ignore a contingency just because it is unlikely.

178 "While some writers consider official demand for gold to be irrational, no one contends that it does not exist." [This is such a strange comment I wonder if there might have been an error in the transcript.]

178ff Gilbert here sums up the SDR scheme: that it is helpful if used wisely, that it can't be a substitute for gold reserves, that it cannot solve the gold-dollar system crisis, and that it doesn't change the fact that some sovereign states are going to want reserves in the form of gold regardless of SDRs; also a system based on SDRs would require heroic assumptions, including that countries will play their part in such a system, they'll be satisfied with reserves denominated in them, and will use them and agree to use them in final settlement or consider them to have value similar to gold. "No serious analyst contends that the SDR scheme and the two-tier gold arrangement provide a fully workable basis for the future of the system." The speaker returns here to his assertion that the US should simply devalue its currency relative to gold in order "to face up to the adjustments required to restore the Bretton Woods system."

Discussion of Dr. Okun's lecture by Arnold W. Sametz, NYU finance professor:

183ff "Dr. Okun has offered us a good and important paper; but he has thus handicapped me as a discussant by leaving no soft spots in which to probe and no easy debaters points to score." Sametz says here he will concentrate on the trade-off between inflation and unemployment; first he criticizes the idea of seeing inflation as "an absolute evil--all cost and no benefit--and hence intolerable." The real concern here is inflation going from a slow creep to accelerating and then destroying the system; Sametz asks why inflation should be "deplored" more than stagnation [that would result from stopping modest inflation.]

185ff comments on the wealth and income effects of inflation, how it redistributes wealth with limited effects on output. Also it adds uncertainty to the value of individual savings or assets; a lower-middle-class family with wealth saved in bank deposits is the principal sufferer from inflation's effects on their wealth, whereas the retired aged are the principle sufferers of the "income effects" of inflation. The author mentions that this is also a generational policy conflict because the young bear the brunt of unemployment whereas the older bear the brunt of inflation [I'm not sure I agree with this, I think it's more poor versus wealthy]; also comments on class or group conflict that emerges with inflation, citing Marx's comment on "the reserve army of the unemployed" and Keynes referring to "the euthanasia of the rentier." "Current income protection conflicts with wealth protection."

187ff Other criticisms of Okun's lecture: that he doesn't point out the severity of the current inflation, the author here cites that CPI was up 25% over the past 6 years; also Okun does not cite the unusually high interest rates now at 7.5% [holy cow dude, just wait 10 or 12 years--you'll have 15% interest rates], the author says here that this indicates inflationary expectations are high and that future inflation may be more severe; other impacts here where inflation affects municipal government spending, etc. He also criticizes Okun for advocating "easing the monetary brakes now" [I guess in the context of likely coming inflation] when there are no clear signs that the economy is cooling off. Sametz next says the worst inflation is yet to come, and yet nobody seems to want to induce a recession.

189 "A livable, midpoint combination of 2 per cent price rises with 4 per cent unemployment (rather than 6 per cent and 3 per cent respectively) still seems compatible with the basic structure and functioning of the economic system."

Discussion of Mr. Fowler's lecture by Jules Backman, NYU economics professor:

193 "Mr. Fowler has presented an extremely comprehensive analysis of our physical situation... I do want to say that this is an analysis of which any practicing economist would be proud." [Holy cow, if this professor thinks Fowler's gobbledygook talk was "extremely comprehensive" and something to be proud of, I can't help but question his judgment.] Sycophantic bullet points to follow here, and then a disagreement about the importance of the Vietnam War as a factor driving inflation, this commentator thinks the Vietnam War was more significant than Fowler, as it both drove price inflation and inflationary expectations: "Price rises have developed during every war and the current situation provides no exception. The end of the Vietnam War would make a decisive contribution to the end of price inflation and would end the inflation psychology." [Ironically, even this was wrong, the inflation got much worse after the Vietnam War ended, look across the 1970s into the early 80s.]

195 Interesting comment here about welfare and anti-poverty programs give money with one hand but then inflation effectively takes that money away with the other hand in the form of higher prices. Interesting.

195ff Comments here on inflationary psychology: private investment decisions are affected by inflation expectations; investments happen earlier because of the belief that they will cost more tomorrow [I think these guys fail to understand certain subtleties of an inflation-based system: if you engineer structural monetary debasement you drive extra GDP in three ways: 1) by pulling forward economic activity (like these commentators describe), 2) by driving all sorts of other unnecessary economic activity that people engage in to protect themselves from inflation (people are forced buy goods or property that they otherwise wouldn't because that property is scarce and will hold value better than the steadily debasing money--see A.D. White's short book Fiat Monetary Inflation in France for more on this), and 3) you literally get "more" GDP because prices are higher (4 cans of crushed tomatoes now produces $7 of GDP when the same four cans produced $3 of GDP eight years ago. It's the same activity but it produces much more "nominal GDP"). The architects of the monetary system want these effects and will employ debasement/inflation in order to manufacture more economic growth than they would otherwise have]. Here however the author echoes Fowler's prescription, defaulting to economics-ese, that you have to hold aggregate demand below stability levels for some time period in order to not just reduce inflation but also change people's expectations of it. [I'd argue that a well-designed debasement system would also require economists operating within that system who are unaware of the overall structural effects of that system. You don't want your economists "jumping out of the system" of Keynesian orthodoxy and seeing it all for what it is!]

197 A section here on disagreement over the investment tax credit, Fowler thinks it should be left in place, but this guy thinks it should be suspended because believes that steadily rising expenditures for new plant and equipment are a driver of inflation. [This strikes me as unbelievably clueless. When you expand capacity, you drive prices down because you have more supply of goods. This is basic capital cycle thinking here, see for example any major industry when there's investment in new plant and equipment, prices and margins go down.]

199 The commentator disagrees with Fowler's advocacy of wage-price guideposts, writing "It will be recalled that the guidelines were abandoned three years ago when they proved to be unworkable. The Nixon administration properly has refused to revive them. It was the Johnson administration that abandoned the guideposts--and for good reasons." Long discussion here of minutiae followed by bullet points listing erroneous assumptions underlying wage-price guideposts:

1) The assumption that there is a direct relationship between unit labor costs and prices,

2) The assumption that the reported increases in private output per man hour indicate what is available for distribution to workers,

3) The assumption that productivity is the major factor in wage determination,

4) The assumption that real labor income should or could increase at uniform annual rates,

5) The assumption that unorganized [labor] sectors would follow the patterns in the organized sectors.

"It is because of these factors that the guideline policy of the Kennedy-Johnson administrations finally had to be abandoned. It would be a mistake to revive them now."

202ff Note this quote which is hilarious and a very justified criticism of centralized control of economic behavior: "Much of the public discussion is in terms of the degree of unemployment required to stop price inflation. Some commentators seem to believe that we have economic controllers sitting before a console with buttons marked more inflation or more unemployment. By pushing the right button the desire results are obtained. Unfortunately, we can't fine-tune our economy by such means." Comments hear also about how 5% inflation hurts people much more seriously than higher unemployment. "Those near the bottom of the economic pyramid experience the squeeze of inflation whether they get larger than average wage increases or not."

203 "So let us not set up false alternatives. Of course we are against unemployment. Of course, we are against price inflation. Of course, we would like the best of all worlds. But we are not choosing between unemployment and price inflation. That choice is already built into the policies of the past few years. We are choosing among degrees of unemployment now or in the future. We can only hope to limit the price we pay, not to escape it."

Discussion of Dr. Gilbert's lecture by Ernest Bloch, NYU finance professor:

207 This guy actually levels substantive criticisms at Dr. Gilbert's lecture, good for him! "I shall devote most of my attention, as he does, to the expansion of international reserves by raising the currency price of gold."

208ff Comments here on how the so-called period of fixed exchange rates was nowhere near as stable as it is claimed to be, as 18 of the 20 export countries devalued their currencies relative to the dollar at least once, and these exchange rate devaluations come in waves: 17 happened in 1949 and 19 occurred in 1967. "All of the world's major currencies, with the notable exception of the Swiss franc, have been changed in value with respect to the dollar." The commentator here cites in a footnote that the pound sterling devalued twice, the deutschmark three times, and the French franc six times. [!]

209 [Good example here of how one can redefine terms in a way to make things sound a certain way when it's actually misleading, in this case an "excess supply of dollars" is not a "demand for gold" even though the author likes to frame it this way, it is really just debasement of the dollar and the US essentially exporting that inflation to everybody else.] "A special problem of the dollar as a reserve, or key currency, arises in this context because all currencies are convertible into dollars, and because the dollar is convertible into gold. With relatively fixed exchange rates, a rise in balance-of-payments deficits somewhere in the world thus and ultimately reappear as an excess supply of dollars--or, in other words, as a demand for gold."

210ff The author comments on how Dr. Gilbert argues that the US, in order to fix its balance of trade, would have to acquire some 300 tons of new gold per year; and then his comments on the basic policy issue of how much the dollar and other currencies have to be devalued relative to that gold. Then he writes "I have some questions about the diagnosis and the suggested remedy." First he comments on how foreign commercial banks can create dollars [Eurodollars] thus the US balance of payments deficit may not be under the control of US authorities in the first place; and also because of the eurodollar market getting larger it is difficult to estimate the "need" for gold in the first place; thus US trade deficits do not provide the clear-cut estimates of the balance of payments problem of the United States after all: the data is too difficult to interpret to actually set the price of gold. This commentator says that Dr. Gilbert does not discuss this part of the argument at all.

213ff More criticisms: even with a "managed" gold price, unanticipated changes in gold supply occur when new gold is dug up from deep mines in South Africa, or from gold that "may emerge from shallower holes reportedly made for generations in the farmyards of France, and in other places." [People bury their gold in their yards or store their wealth in gold jewelry, but when gold gets to a high enough price often you "unlock supply" as people take their jewelry and coins or whatever and sell them back into the marketplace.] Monetization of private gold stocks could have inflationary consequences leading to further dislocations and this would require further gold price adjustments. "No one knows how much gold is in private hands." [Yet more reasons to own something gold-like, including assets like Bitcoin, that aren't a liability of someone else, are anonymous/pseudonymous, are bearer assets, etc.] Basically the guy's point is what's the difference if the United States acquire some given amount of gold each year in order to set the gold price, it would still be conducting worldwide monetary policy just as it does today, and thus the argument in favor of a change in the gold price is not very strong. "Indeed, one wonders whether the monetary authorities--even of the surplus countries--would be happier with a managed gold price system then with the present system that involves a managed dollar supply." [And of course, once again, this gold convertibility issue totally went away within a matter of months as Nixon eliminated gold convertibility with the stroke of a pen.]

214 Finally, criticisms of Dr. Gilbert's assumption that a dollar-gold devaluation can be set efficiently by the US Congress or by political bodies abroad, as well as his assumption that financial markets would remain stable during this price reset. The author cites [as an example of the difficulty of getting a global consensus] the development of the SDR scheme that took two years of negotiation to arrive at an agreement--plus another two years to get enough signatures to activate it--and final agreement only happened after a major political change in France.

215 Cute quote here to finish off the commentary: "The present system is perhaps best described by the remark reportedly made by Maurice Chevalier when he was asked how it felt to be eighty: 'Very nice, considering the alternative.'"

Summation by Participants: [this is a transcript of each speaker's closing remarks]

217ff Arthur M. Okun: Okun first comments on how he did not mention dangers from the acceleration of inflation in his oral presentation but it is discussed in the written version; basically concern about this issue is implicit: if we weren't concerned about acceleration we could just create a "cost of living bond" and tie everyone's income to the cost of living: "It is precisely because we are concerned about acceleration that these proposals are not the answer." Because inflation feeds on itself such a bond wouldn't let us live with inflation in any satisfactory fashion because the inflation would simply accelerate. Also: 4-5% inflation is already a problem! It's not a problem just because it might turn into 8 to 10% inflation.

218ff Comments on the actual cost of inflation, and how much we should be willing to pay in that cost to control it; on wanting to use all the available tools, and not handicapping ourselves. Also comments defending jawboning/price guideposts: Okun claims that prices accelerated after the guideposts were abandoned, giving various examples [this is a relatively weak argument here.]

220 Finally, Okun cites a CEO of a major corporation who asked for a "numerical speed limit" on wages, the CEO (allegedly) said "If there's a government number, I'll come out of my next collective bargaining settlement faster, with a lower settlement. I won't come out with the number the government sets, but I'll use that number as a place to bargain from, and I'll be better off as a result of that number."

221ff: Dr Fowler: comments on the "cultural lag" in Washington; that there's something wrong in Washington [you think??]; and then very typical government apparatchik-type comments on "what are the procedures and mechanisms that should be designed to create in our system a way of overcoming or dealing with the natural cultural lag." [This guy once again shocks me with his thinking: he literally thinks he can micromanage anything and everything, including a deliberate feature of the US government.] Comments here on how Fowler didn't get the tax increases and other actions from Congress that he thought he should have had when he was at the Treasury. [Again, it's shocking how thin his thinking is: everybody wants there to be "no lag" in Washington when it comes to the things they want the government to do, but everybody wants a lag when it's the things they don't want the government to do. But this guy, who knows his ideas and policies are "right," very confidently believes that if he could just get the things done that he thinks should be done, everything would be fine. It's hard to believe putatively intelligent people can think this shallowly.]

223ff Interesting here to view the author's rhetoric: "Think of the feelings of a manager or operator of the nation's fiscal affairs being confronted by a legislative body unwilling to take the fiscal action necessary to prevent a threatened inflation, or deal with one that was perhaps beginning to move." He then requotes himself from a speech he gave before the National Press Club, saying, "A vote against the tax increase is a vote for the resumption of the old boom-and-bust cycle that every American over twenty-one remembers with sadness, bitterness, and apprehension." [He literally thinks "his" tax hike is going to be timed so perfectly to stop a boom/bust cycle? This is why fine-tuning makes things worse.]

224 Repeat comments here lauding the UK's Chancellor of the Exchequer and his powers; lamenting the separation of powers set up in the Constitution as well as government's distributed fiscal responsibility; he repeats his demand that the executive branch should get a limited temporary authority to make fiscal policy adjustments. [Essentially: because he didn't get a tax hike on time, he now wants to rewrite the Constitution and change up the separation of powers.]

225 Another interesting quote--interesting because of the obvious illogic: his idea "is not a new or novel conclusion" and in fact Kennedy made a similar recommendation to Congress, but "It wasn't even given a hearing." [A second-order thinker would conclude from this that such an idea would be DOA, but somehow this author reasons, somehow, that because it died before it is therefore "not new or novel" and thus should be considered. Note that under the current Presidential Administration in the USA one thing we all should realize is that you do not want any more power going to the executive branch than it already has. You don't want government economists running around thinking they can fine-tune the economy either.]

226ff Final comments on the imposing "voluntary restraint"/jawboning/setting guideposts on prices idea: he likes it and thinks the president/government should use it, but he wants to be clear that it's not an alternative to fiscal and monetary restraint. He doesn't think the failure of jawboning policies that we have seen recently is a reason to not still use them, once again using the "this is not anything new" argument to support guideposts; and he blames their lack of effectiveness on the fact that the government had no business asking for voluntary austerity when the government was running its own big deficits.

229ff Finally final comments from Dr. Gilbert: "Dr. Gilbert, I would like to finish this session by, say, about five minutes after five so we can still have the reception. Do you think you can manage that?" "That should be adequate time." [They had to squeeze Gilbert on his time, likely because Dr Fowler went on for way too long.]

229ff Gilbert echoes comments about the "political lag" problem, and talks about how "the business cycle is giving way to what might be called the election cycle." Comments on trade-offs with the political process and inflation where continued inflation ends up with a breakdown of democratic government and that also inflation damages standards of responsibility, the social order, and lawmaking and administration. [In that, he's absolutely correct. Think of inflation as a type of corrosion: of values, of thrift, of morals, of responsibility, of the building blocks of a healthy society.]

230ff Gilbert addresses professor Bloch's comments about the change in gold price: whether there would be "one for all time" or changes from time to time: the author thinks the former is reasonable [!!! as if there would be one devaluation and never another one?] and he doesn't understand why one would raise the second possibility at all: he uses the argument "The present price of gold was fixed in 1934 and proved to be reasonably adequate for twenty-five years" and it was really the inflation of World War II that made the 1934 gold price not work. "To assume the contrary it is necessary to believe that the United States is going to allow peacetime inflation in the future at a much greater rate than has been the case historically." [Once again predictions are hard especially about the future: what this author thinks would never happen is exactly what happened. The one-time change in the gold price--had we actually stayed on the gold standard--would probably have had to be changed a multiple times just in the 1970s, as the entire decade featured rampant inflation at levels far higher than these guys ever dreamed.]

232 Final comments here on professor Bloch's question on who would actually change the price of gold and how difficult it would be to get an international agreement on it: Gilbert  argues that really it only matters what the dollar price of gold is, and that would be determined by a sovereign act of the US Congress; he does agree with professor Bloch that financial markets would be unstable during this price setting period, but he then argues that there would already be disorder in financial markets under conditions where the US price of gold would have to be changed, so this would be really establishing a new basis for stability. [That's also hilarious, a total circular argument: "we would do this thing under hypothetically unstable conditions, so it doesn't matter that instability will result from it."]

232 "I believe that at its present price gold cannot have the active role in the monetary system that was contemplated at Bretton Woods. One must go further and say that the alternative to changing the price of gold is really to change the system in quite fundamental ways. What we have to ask ourselves about all this is whether the international business system will function better with the first alternative or with the second." [Once again, all this handwaving and debating on the price of gold ultimately mattered not a trice: Nixon took care of the entire decision just as the ink was drying on the pages of this book. The irony is incredible.] 

To Read:

The Charles C. Moskowitz lectures [this lecture series began in 1959; see in particular 1961: "The Challenges Facing Management" by Don G. Mitchell, President of GTE; 1966: Government Wage-Price "Guideposts in the American Economy" by George Meany, President AFL-CIO, et al; 1967: "The Defense Sector in the American Economy" by Senator Jacob K. Javits, et al.]

Milton Friedman: Inflation: Causes and Consequences

Arthur F. Burns: The Business Cycle in a Changing World

Walter Heller: New Dimensions of Political Economy ["valuable"]

Harry Johnson, ed.: Roy Harrod on the Price of Gold [collection of essays]

***Arthur I. Bloomfield: Monetary Policy Under the International Gold Standard, 1880-1914