Article by: thefatherphil, author of: When the Cows Come Home
Contributor – the Know Nothing Digest
The following is a discussion of Keynesian economic theory and Classical economic theory, the theories’ origins, the theories’ leading economic supporters, the application of these theories in recent history, and the effect of these theories on foreign currency exchange rates. This paper is dedicated to the boiling down of the role of foreign currency manipulation in the modern world’s financial industries and a brief explanation of how we, as a society, got where we are now. The aim of the paper is to demystify why the principles surrounding and controlling the World’s money supply remain in-flux.
Currency Exchange, Classical and Keynesian Economic Theory, and the Age of the Flip Flop
In opening, let us discuss what is meant by the term, Classical Economics. What is now Classical economics arguably began as Feudalism and slowly gave way to Capitalism. As economists, we define Feudalism as a societal construct based on legal and military customs that were in effect in medieval Europe from the 9th to the 15th centuries, and we define Capitalism as an economic system based on the rule of law with a focus on property rights. We further define property rights as the private ownership of the means of production for profit. Capitalism has been propelled into dominance by the Industrial Revolution. Classical Economics is the philosophical hand that pulled medieval society out of the peasant slums. Arguably, the study of aggregate supply and demand has lead to an almost complete minimization of forcible removal of the World’s Heads of State by proletariats and foreign detractors. (Farnham, P. G. 2014)
Today, the theory of Classical economics is considered to have been constructed into cohesive theory by writer and economic philosopher Adam Smith, in his 1776 book, the Wealth of Nations. Followers of Classical economics believe that free open markets generally regulate themselves, granted they are free of coercion. Adam Smith called this market self control the “invisible hand.” Smith’s “invisible hand” means that economic actors interact with each other in mutually beneficial ways so that supply in reality equals demand and vice versa, under certain economic conditions. However, monopolies or any type of monetary coercion or even just a general lack of market competition completely interrupts the self control of the invisible hand. The Classical economic theory insists that government economic intervention is just another unnatural interruption of the open market’s self correction process, and that in the long run the open market will stabilize itself. (Opitz, 1976)
The United States stock market crash of 1929 and the United States housing bubble burst of 2006 are both examples of United States market contraction after a period of rapid expansion. High revenue return from the stock market in the 1920’s and from the housing market bubble in the 1990’s and early 2000’s flooded the international market with US currency. This excess US currency devalued the dollar and made foreign investment in the United States less appealing. All of these factors resulted in high unemployment and decreased US business expenditure. Aggregate supply and demand both decreased. Classical economic theorists did not have positive news for the suffering masses involved in the ensuing economic crises.
John Maynard Keynes argued that governments should solve problems in the short run rather than waiting for market forces to do it in the long run, because, “in the long run, we are all dead.” Keynes is the British economist who popularized what came to be known as Keynesian economic theory. In contrast to Classical economic theorist Friedrich August Hayek, J.M. Keynes believed that those in power who have a means of easing the economic fluctuations between boom and bust should do so. Hayek speculated that deficit spending does not lessen economic suffering, but puts off the open market self correction until a later date. These two schools of thought are still debated today. Keynesian economic theory became the prominent economic theory in 1939 and prevailed until United States president Richard Nixon brought it (down with him) out of favour during the oil crisis of 1973-1979. (O’Driscoll Jr, 2010)
After the Great Crash but before Nixon Shock, a new international monetary system was established in Bretton Woods, New Hampshire, in the United States in 1944. This international monetary system has become known as the Bretton Woods system. This system was concocted to promote global economic growth, to ensure the stability of foreign currency exchange rates, and to prevent competitive devaluations (at least among the 44 nations attending the Bretton Woods conference.)
Harry Dexter White and John Maynard Keynes laid the groundwork and began organization of the International Monetary Fund and the World Bank at the Bretton Woods conference in 1944. The International Monetary Fund (or IMF) is self described as, “189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” The international money cartel works together to stabilize each other’s currencies and to promote high employment and international trade to continue growth of each country’s economies through the collection of statistics and data. The data and statistics collected are concerning monetary policy and economic activity of the partnering nations. The data concerning Balance of Payments (or B.O.P.) is especially important when making monetary policy decisions over currency valuation. If one country imports more than it exports than most likely this country’s currency supply would exceed foreign market demand for it and create the apparent need to devalue the oversupplied currency. The World Bank publicises itself as an institution attempting to reduce international poverty. Quite literally however, the World Bank is a financial institution that loans funds to countries on this planet for investment in infrastructure or for disaster relief or for protective military funding. Both the World Bank and the International Monetary Fund are products of the Bretton Woods Conference. It was at Bretton Woods, where these international financial institutions were conceptualized and organized by academic debate chiefly between British economist John Maynard Keynes and American economist Harry Dexter White.
Similar to Charter of the Forest a.k.a., the Magna Carta in 1215, and the Plaza Accord, the conference at Bretton Woods was to establish rules for trade between independent nation-states with the intent on facilitating open market trade. At the Bretton Wood conference, the nations pledged to adopt a monetary policy that tied each nation’s currency to gold, re-institutionalizing the gold standard. This was to bridge the temporary imbalances of payments. Keynes pushed for the IMF and World Bank to offer strong financial incentives for countries to avoid excessive trade deficits or surpluses, but Harry Dexter White used the US’s greater negotiating strength to establish a more conservative international banking institution. (Steil, 2013)
In addition to heading efforts on the part of the United States to organize a world banking cartel, Harry Dexter White was also revealed to have given Soviet agents classified American treasury documents by the predecessor to the National Security Agency, the U.S. Army’s Signal Intelligence Service. If not an agent of the Soviet union, then an unwitting accomplice to Soviet spies, Harry Dexter White died suddenly of a heart attack after being exposed in 1948.
Keynesian theory recommends utilizing counter-cyclical economic policies to help regulate the open market. Such counter-cycles include:
- Deficit spending on a country’s infrastructure, such as building or repairing roads and bridges, to stimulate a reverse on unemployment.
- Raising taxes in attempt to prevent inflation during periods of excess growth in demand.
In contrast, Classical economic theory suggests governments should raise taxes during an economic downturn and cut taxes when there are budget surpluses. Classical economic theory proposes governments balance their budgets, while Keynesian economic theory holds that there appropriate times and legitimate reasons for a government to spend in excess of taxable revenue collected. Keynesian economic theory was brought into the public sphere during such an appropriate time, during the Great Depression in the United States. Keynes felt that any saving in excess of planned investment was excessive saving, from an overall economic viewpoint. It was to be discouraged, because on a grand scale, excessive saving practiced by the masses induces economic activity gridlock. If all individuals in an economy are saving, then no one is spending. The economy enters a depression. Firms’ inventories start to pile up in what economists call a general glut.
In 1971 US president Richard Nixon initiated a series of economic measures that unilaterally canceled the convertibility of the US dollar to gold. These actions actions essentially abolished the Bretton Woods international financing system and replaced it with a free floating fiat currency exchange rate system in 1973 with the Smithsonian Agreement. (Office of the Historian, 2017)
When Nixon faced impeachment he had just finished publicly declaring the Keynesian leanings of US economists, so the nation’s economists turned to Hayek’s Classical economic theory for direction. In light of the housing bubble and the following banking giant crises; Barack Obama lead the US back down the Keynesian path to “bail out the banks for a better today.”
Ben Bernanke’s performance as chairman at the US Federal Reserve during the banking crisis in 2008 is widely considered to having saved America and by proxy, the rest of the world, from another Great Depression. Barack Obama was widely criticized for supporting Fed Policy during the bailout of American/globalist banks that made unsafe loans and investments but were considered “too big to fail” due to catastrophic global economic consequences.
Whether Obama’s Keynesian effort to bail out the Big Banks of Wall Street will prove to be successful or have global adverse effects like the Plaza Accord did on Japan remains to be seen. During the 1980’s the US dollar appreciated 50% against the next four countries with the largest economies, Japan, England, West Germany and France. The Plaza Accord was an international agreement between these countries to devalue the US dollar against the German Deutsche Mark and the Japanese Yen. Groups of firms across the United States rallied together in protest to the accord. The Plaza Accord was seen by US Business as economic manipulation or coercive globalization at best. Companies like IBM and Caterpillar Inc. and Motorola lobbied Congress to pass protectionist laws for United States Business. The White House was inspired to host the Plaza Accord in New York City in light of upcoming trade restrictions possibly passed by the heavily lobbied US Congress. In this example of foreign currency manipulation, the US firms lobbied for Congress to follow Classical economic theory, whereas the White House was inclined to pursue Keynesian economic theory in the Plaza Accord.
A new development in the study and or discipline of economic theory is the use of computer generated economic models based on collected and analysed global economic data. This data comes from organizations such as World Bank and the International Monetary Fund. BlackRock, Inc, is a modern US investment firm, that has supported the inclusion of mainland Chinese companies on the stock exchange
While there are numerous other incidences of what is considered “foreign and domestic currency manipulation” that are important to understand the general environment of the World economy today; the above discussion is a minimalistic summary of this all encompassing field. The reader should explore further the concepts discussed here and develop better informed decisions in regards to their role in the global economy. Economics is the study of choices and as Business Persons, while our world becomes more and more economically interconnected it is becoming increasingly important to act as responsible global citizens in our micro and macroeconomic actions. In the real world currency manipulation is not an economic crime, but a tool to prevent economic catastrophe. It would seem that a mixture of Classical economic theory and Keynesian economic theory is essential to balancing today’s global economy and preventing or reversing government and or private sector due to unforseen consequences of our firms’ actions.
- (Steil, (2013), The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, https://www.foreignaffairs.com/reviews/capsule-review/2013-08-21/battle-bretton-woods-john-maynard-keynes-harry-dexter-white-and)
- (Farnham, P. G. (2014), Economics for Managers)
- (Opitz, (1976), Adam Smith and the Invisible Hand, https://fee.org/articles/adam-smith-and-the-invisible-hand/)
(O’Driscoll Jr, (2010), Keynes vs. Hayek: The Great Debate Continues, https://www.wsj.com/articles/SB10001424052748704738404575347300609199056)
(Harman, (1989), From Feudalism to Capitalism, https://www.marxists.org/archive/harman/1989/xx/transition.html)
(Office of the Historian, (2017), Nixon and the End of the Bretton Woods System, 1971–1973, https://history.state.gov/milestones/1969-1976/nixon-shock)
- ( Stephenson, (2014), Reuters, Ben Bernanke Reveals What He Was Thinking When AIG Got Its $85 Billion Bailout,