Re: two currencies and Korean war

[Ted Winslow <egwinslow@xxxxxxxxxx>]

Per wrote:

> Having said that, I felt I should wipe the dust off of Keynes' Treatise and
> do like you - pull a couple of quotes. So how about this one?
>
> "Furthermore it is a peculiar characteristic of money contracts that it is
> the State or community not only which enforces delivery, but also which
> decides what it is that must be delivered as a lawful or customary dischrage
> of a contract which has been concluded in terms of the money of account. The
> State, therefore, comins in first of all as the authority of law which
> enforces the payment of the thing which corresponds to the name or
> description in the contract. But it comes in doubly when, in addition, it
> claims the right to determine and declare *what thing* corresponds to the
> name, and to vary this declaration from time to time -- when, that is to
> say, it claims the right to re-edit the dictionary. This right is claimed by
> all modern states and has been so claimed for some four thousand years at
> least. It is when this stage in the evolution of money has been reached that
> Knapp's chartalism -- the doctrine that money is peculiarly a creation of
> the State -- is fully realised." [Treatise on Money, Vol. I, p. 4]

Given the grandiose contemptuousness with which you do it, you might try
pulling one that supports the interpretive claim you made.  The passage
doesn't say that people value money as a store of wealth because they hold
what you are calling "chartalist" views about the value of money.  It says

"it is a peculiar characteristic of money contracts that it is
the State or community not only which enforces delivery, but also which
decides what it is that must be delivered as a lawful or customary discharge
of a contract which has been concluded in terms of the money of account."

It's this that allows Solon to debase the currency.  They are precisely the
characteristics pointed to in the passage about Solon I quoted, the ones
that make debasement possible - a rational policy, according to Keynes,
because it reduces the weight of the dead hand accumulated rentier wealth on
the active classes.  Where in your "chartalism" is their logical space for
this policy and the conception of rentier wealth on which it's based?

Keynes, of course, never says that people desire to hold money as a store of
wealth because they believe rationally on the basis of a "chartalist"
understanding of money that the state will act to preserve the future value
of their holdings.  I've pointed out to you many times what, in writing from
Indian Currency and Finance to "My Early Beliefs," he explicitly does say
about their motives.  What he repeatedly says directly contradicts your
"chartalist" explanation.  Your explanation also also faces the problem that
if you derive the use of money as a store of wealth from what you claim are
rationally expected consequences you are disconnecting it from true
uncertainty since this describes a context where consequences are unknown
and unknowable.

There is another good reason it's not Keynes's idea.  It's false.  The "vast
majority" (were talking very big percentages here) of the population have
never heard of the idea that what they use as "money" is usable as money
because the state insists taxes be paid with it, let alone based their use
of what the state has decided "must be delivered as a lawful or customary
discharge of a contract which has been concluded in terms of the money of
account" to discharge such contracts, buy groceries, pay taxes etc. on
belief in the idea.

> the
> balance between bullishness and bearishness, which determines the rate of
> interest according to Keynes, involves a rational, or at any rate
> pseudo-rational element of equalising expected yields of various types of
> capital assets with the money rate of interest.

This doesn't answer the question I asked.

It's also false.

What is equalised by this balance are the desired holdings of money (in
Keynes's sense) and the amount of money available to be held. How do you
explain it with your definitions of "money"?

"Conventional" expectations about future interest rates and the "very strong
irrational feelings" about money are linked in the way set out in the QJE
passage, i.e. the "conventional or instinctive" "feeling about money" "takes
charge" when the irrational "conventions" expectations of future interest
rates "have weakened."

Keynes assumes a small minority of market participants - rational
"speculators" - base their behaviour on rationally "forecasting the
psychology of the market." As this possibility itself requires, however,
the "vast majority" of participants are assumed to form their expectations
of future rates of interest "conventionally" i.e. irrationally.  Their
expectations are "fixed by mass psychology," by "the mass psychology of a
large number of ignorant individuals" (VII, p. 154).

"This [liquidity-preference arising from speculation about future rates of
interest] is closely analogous to what we have already discussed at some
length in connection with the marginal efficiency of capital.  Just as we
found that the marginal efficiency of capital is fixed, not by the 'best'
opinion, but by the market valuation as determined by mass psychology, so
also expectations as to the future of the rate of interest as fixed by mass
psychology have their reactions on liquidity-preference; - but with this
addition that the individual, who believes that future rates of interest
will be above the rates assumed by the market, has a reason for keeping
actual liquid cash, whilst the individual who differs from the market in the
other direction will have a motive for borrowing money for short periods in
order to purchase debts of longer term.  The market price will be fixed at
the point at which the sales of the 'bears' and the purchases of the 'bulls'
are balanced."  (VII, 169-70)

This is consistent with his general claim about the "vast majority" of
participants in stock and bond markets that:

"The vast majority of those who are concerned with the buying and selling of
securities know almost nothing whatever about what they are doing.  They do
not possess even the rudiments of what is required for a valid judgment, and
are the prey of hopes and fears easily aroused by transient events and as
easily dispelled.  This is one of the odd characteristics of the capitalist
system under which we live, which, when we are dealing with the real world,
is not to be overlooked."  (VI, 323)

These ideas are the basis of his own investment practice (which was rational
"speculation" in his sense).  Here he is, for instance, corresponding with
business friends in July 1932 about why it's nearly certain that U.S.
interest rates are going to fall in the near-term future.

"the most striking feature of the immediate situation is the extraordinary
disparity between yields in London and yields in New York of comparable
securities.  It seems to me quite impossible that the present situation can
long persist.  And I should have supposed it to be probable that the
readjustment would be brought about by a substantial rise in the prices of
prime fixed-interest securities in New York.  The present may be the chance
of a lifetime for the purchase of the latter.  Obviously everyone in New
York is scared so stiff as to be unable to move.  But that may be the
opportunity of others away from any unsettling influence of the local
atmosphere.  No serious risk can arise unless the existing financial system
in America is going to peg out altogether.  I suppose that that is just
possible, but I cannot believe that it is probable." (XII)

"The whole subject has, of course, many more ramifications than can be
discussed in a letter, but almost everyone who has any pretensions to being
a sound or orthodox thinker on financial problems in New York probably has
his brain stuffed with fallacies on this particular matter.  So there is an
opportunity for anyone, if there is anyone, who can think (or so it seems to
me) scientifically straight on this issue." (XII, 320)

In the GT he claims this was a period in which the "very strong irrational
feelings" about money had taken charge; he claims the U.S. was then in "a
financial crisis or crisis of liquidation"  "when scarcely anyone could be
induced to part with holdings of money on any reasonable terms." (VII,
207-8)

What explanation do "circuitist" and "chartalist" ideas provide for a
"crisis of liquidation"?

> I have made this point several times before. No matter how many quotes you
> pull about the 'irrationality' streak in Keynes' thinking (something which I
> find very enlightening and appreciate enormously), there will nevertheless
> remain another 'rational' side to his economics. After all he viewed
> economics as 'a special branch of logic'.

The last time you made this "point" I pointed out to you that it was based
on misunderstanding my interpretive claims.  I don't claim Keynes's
economics is irrational.  I claim, on the basis on an enormous amount of
textual evidence such as that above, that his economics is based on the
premise that there is a significant degree of irrationality in economic
behaviour in general and in financial market behaviour in particular.  He,
of course, understands this theory to be itself rational i.e. defensible on
reasonable grounds as a realistic explanation of the phenomena with which
it's concerned.  I also claim, again on the basis of textual evidence of the
kind I've just produced, that his theory allows for rational behaviour - the
most important being rational "speculation" such as he himself practiced in
financial markets.  Pointing out mistakes to you doesn't seem to have much
effect.

You're not, are you, claiming that you can pull out lots of textual evidence
showing that Keynes assumes the "vast majority" of financial markets
participants are well-informed and rational and that his explanation of
"conventional valuation" in financial markets is based on this assumption?
That would be as reasonable a claim as the "circuitist" claims we were
discussing.

You are also, like Gunnar, misinterpreting Keynes's claim that economics is
a "branch of logic."  I've been through this several times in a very
detailed way with Gunnar (e.g.
<http://csf.colorado.edu/forums/pkt/2001/msg00241.html>).  "Logic" in this
context means "human" rather than formal logic and the whole point is to
argue that, on grounds available from "logic" in this sense, the phenomena
of economics do not have the character that allows economics to be based
mainly on deductive reasoning from fixed axioms.  It particularly limits the
applicability of mathematical forms of such reasoning.

Like you, Gunnar doesn't find this interpretive argument convincing.  At
least this is what I conclude from the fact that, though he's never provided
any argument demonstrating it's mistaken, he keeps endlessly repeating the
interpretative claim that when Keynes described economics as "an apparatus
of  the mind, a technique of thinking" and as "a branch of logic" he meant
that its method was formalized deductive reasoning from fixed axioms.  You
too treat deductive reasoning from axioms as the method of economics -
that's the basis of your "chartalism" isn't it?

According to Keynes there is also a "deep-seated obsession" associating
"science" with deductive reasoning from axioms.  (X, p. 186)

Ted

Ted