THE GOLD STANDARD AND BALANCE OF PAYMENTS

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From wmosler@xxxxxxxxxx =====
>>
>>
>> Not true. The General Theory was published in 1936 -- while the Gold
>> Standard
>> was abandoned years earlier.
>
>Domestically, in the US, but still on gold internationally.

that is not true by 1936 there was no intermmnaational gold standard.
But no
>matter. The GT contains persumptions of gold standard constraints, such
>as but not limited to interest rate determination?
>


Keynes's liquidity preference determination of the interest rate doies NOT
require a gold standard!

>>
>> As the biographer of Keynes, Robert Skidelsky noted "what made his book
>>
>> [Tract on Monetary Reform] shocking was its iconclasm of expression and
>> its
>> attack on the gold standard". From then on Keynes attacked the gold
>> standard
>> every chance he got. Keynes believed, according to Skidelsky; "the gold
>>
>> standard itself was an important source of price instability"
>
>Agreed!
>
>>
>> Keynes described the gold standard as "a barbarous relic" and he always
>> championed a managed money system instead-- where if necessary, for
>> "symbolic
>> or conventional values" we can make the managed money system look like
>> there
>> was gold underlying it -- as long as we can "print gold
>> nationally...[and]
>> internationally." and do not rely on a gold standard!
>>
>Agreed!
>
>> In his Clearing union writings for Bretton Woods, Keynes, according to
>> Skidelsky "started off by dismissing the classical theory of the gold
>> standard. The flow of gold never did preserve equilibrium in the
>> balance of
>> payments".
>
>right! but even there is the language creeps in- balance of payments
>'equilibrium' is a gold standard construct.

No the question of equilirium is a question of the balancing of forces.

With floating fx,
>the balance of payments is what it is, etc.

The actual accounting value of the balance of payments is whatever it is in
any period whether you have fixed or flexible exchange rates -- Equilibrium is
a concept Marshall borrowed from physics and requires a balancing of opposing
forces!!

>
>>
>> I could continue -- but I think I have given you enough quotes from
>> Skidelsky
>> and Keynes to indicate that Keynes was not applying his analysis and
>> proposals
>> to a gold standard system -- nationally or internationally!
>
>Maybe not intentionally, but in fact seems that he indeed was. His
>expanations of interest rate determination is pure 'fixed' exchange rate
>stuff, as well as balancing budgets across the cycle, etc.

No Keynes argued for a fixed exchange rate as a stabilizing force permiting
entrepeneurs to make long range investment plans -- but the exchange rates
were not to be fixed in perpetuity, but they could change under conditions,
well specified in advance, -- allowing people to make long term international
contractual commitments in a world of (nonergodic)uncertainty -- a necessary
aid for entrepreneurs to be able to attempt to balance cash flows over time--
and therefore avoid (a) a liquidity problem, and ultimately (b) bankrupcy.

Flexible exchange rates -- make it impossible to evaluate long term
international investment projects (for example) or even domestic in vestments
aimed for export markets -- because markets to hedge against exchange rate
fluctuations more than 180 days out rarely if ever exist .

Yet investment project profitability expectations requires one to calculate
the flow of future quasi-rents over long-lived capital goods relative to the
money costs of these goods (when both quaasi rents and money costs are
specified in terms of the same currency.)


>
>
>
>> > While mainstream doesn't know this specifically, they
>> >none the less aren't technically wrong in dismissing some of Keynes as
>> >inapplicable today (though I can do the same for their ramblings).
>>
>> Not true! The belief
>
>mine's not a 'belief.' just statements of accounting facts.


Accountin g facts are merely ways of keeping score and have nothing to do with
equilib rium in blanace of payments or the viability of industry, nations,
etc.

jusdt like a balance sheet is merely a way of keeping score-- and even DOA
entreprises have balance shhets!!

Accounting facts are meaningless !!
>
> in a flexible exchange rate system which you
>> apparently
>> share with mainstream economists requires the assumption of a very large
>>
>> Marshall-Lerner condition.
>
>I never make those assumptions. They don't matter to what I'm saying
>either way- whether they hold or not makes no difference.

Well if the Marshall Lerner conditions do not hold tghen ,by definition,
flexible exchange rares are going to make blanace of payments problems worse
-- no matter what the "accounting facts" are at any point of calendar time!!

So if you are advocating flexible exchange rsates as a desireable policy, then
you must implicitly be relying on large Marshall-Lerner conditios values-- or
else you are advocating a suicidal policy for each nation!!


>
>
>
> Otherwise flexible exchange rates
>> exacerbate,
>> rather than cure, the problem.
>
>Of course, we disagree on what 'the problem' is. To you it's net imports,
>etc. And that's a throwback to fixed exchange rates, where arguably that
>was a problem, as net imports corresponded with an outflow of gold or
>whatever the currency was convertible into.


It has nothing to do with net imports per se -- it has to do with a balancing
of forces!!~ For example, in recent years, much of what you call foreigner's
demand for net US assets - is the result of the Bank of China and the Bank of
Japan (among other central banks) wanting to increase their holdings of
foreign reserves in their balance sheets--- but these accounting facts in
Japan and China are counted in terms of YEN in Japan and the local currency in
China.

Now what happens to the Bank of Japan's accounting fact (balance) sheet) if
the Yen was suddenly to be upward val;ued by say 30 per cent. What happens to
the asset side of the BOJ balance sheet -- as a matter of accounting facts???

>
>
> Emopirical evidence including the
>> J-curve analysis indicates that for most nations the Marshall-Lerner
>> condition
>> does not hold in the short-run
>
>So??? Imports are a benefit, exports a cost.

In real terms imports may be a benefit and not a cost -- but not in financial
terms -- and given the business that you are in, I should not have to tell you
that its money (and finance) that makes the real world go round-- and not vica
versa! That's why Keynes called it the general theory of MONEY, interest and
EMPLOYMENT where MONEY IS NEVER NEUTRAL IN EITHER THE LONG RUN OR THE SHORT
RUN.
>
> and in the long run we'll all be dead! So
>>
>> flexible exchange rates are the problem, not the solution.
>> >
>>
>as above. The problem is unemployment, not 'balance of trade,' etc.
>for that, one needs flex exchange rates to be able to sustain domestic
>demand such that the domestic labor force is fully employed.

THAT JUST AIN'T SO UNLESS THE MARSHALL -LERNER CONDITION HOLDS OR TGHE NATION
TURNS TO AUTARKY!

ANY nation
>can do that independently. There are not 'global' constraints that
>prevent domestic full employment, only self imposed constraints.

AGAIN THAT JUST AIN'T SO UNLESS ---(AS ABOVE).
>
>> I believe that by tying your argument regarding deficits and foreign
>> savings
>> demands for US dollar denominated assets with the desire of flexible
>> exchange
>> rates, you are tying you very correct innovative view of savings and the
>>
>> demand for net assets (which underlies Keynes's liquidity preference
>> analysis)
>> to the very inapplicable flexible exchange rate system -- and thereby
>> draw
>> away attention -- and deleting the importance --from your truly
>> important
>> deficit-savings message.
>
>The message is, the US or any other country employing flex fx policy can
>independently sustain domestic full employment.

AGAIN THAT JUST AIN'T SO IF YOU ALLOW THE ECONOMY SO THAT DOMESTIC RESIDENTS
ARE ABLE TO ENTER INTO DEBT CONTRACTS WITH FOREIGNERS BEFORE A CHANGE IN THE
EXCHANGE RATE. Contracts matter in our entrepreneurial economy-- and as you
well know wshen Deutche Bank or any other foreign enterprise backsa out of a
contractual commitment because of rapidly changing exchange rates, etc. this
can play havoc with the the best laidplans of mice, men and entrepreneurs!!


>>
>> But we have gone through this before and I don't seem to be able to get
>> you to
>> understand why the lack of aMarshall -Lerner condition makes a
>> difference.
>>
>
>As above. Can't get you to see imports are the benefit, not the cost!!!


sEE MY ABOVE STATEMENT ABOUT MONEY MAKING THE WORLD GO AROUND.

Paul





Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
office phone #;(865)974-3303; office fax#(865)974-4601
home phone and fax # (561)369-1951
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/Davidson.html