A Tract on Monetary Reform (Great Minds Series)

Rating:
Summary: Some great old ideas, including the famous long run
Review: The Preface of Monetary Reform by John Maynard Keynes is dated October 1923, in a time when there were few economists. As the Preface of this book states this dire aspect of the situation:

"Nowhere do conservative notions consider themselves more in place than in currency ; yet nowhere is the need of innovation more urgent. One is often warned that a scientific treatment of currency questions is impossible because the banking world is intellectually incapable of understanding its own problems. If this is true, the order of Society, which they stand for, will decay. But I do not believe it. What we have lacked is a clear analysis of the real facts, . . ." (p. vi).

There are charts in this book to provide the facts which Keynes was concerned about. Index Numbers of Wholesale Prices Expressed as a Percentage of 1913 on page 5 covers the years 1913 to 1923 (First half-year) for nine nations, looking most outstandingly bad for Germany, which has a final number of 765,000 for half of 1923, far larger than the maximum number of any other country. Italy was at 624 in 1920 and declined to 577 in 1921, still higher than the 510 monthly average that France had in 1920.

A chart at the top of page 18 with dates from 1815 to 1922 is supposed to illustrate "what a splendid investment gilt-edged stocks had been through the century from Waterloo to Mons, even if we omit altogether the abnormal values of 1896-97. Our table shows how the epoch of Diamond Jubilee was the culminating moment in the prosperity of the British middle class." (p. 18). But for people who were concerned about the tumble taken after 1914, things were not so great. "The whole of the improvement of the nineteenth century had been obliterated," (I'm looking at an old edition, so my page numbers might be way off from whatever book you might be able to buy today).

The basic information that is most important to Society as a whole is contained in Chapter I, The Consequences To Society of Changes in the Value of Money, considering separately the interests of the Investing Class, the Business Class, and the Earner. The power of any government which can produce money merely by printing it is considered in Chapter II, Public Finance and Changes in the Value of Money, particularly with respect to Inflation as a Method of Taxation. In order to show that a government might have some choice in such matters, Keynes also considers "Currency Depreciation versus Capital Levy." If this seems like an odd topic now, Keynes is reassuring that such a move might only be considered "when the State's contractual liabilities, fixed in terms of money, have reached an excessive proportion of the national income." This might happen (sooner or later) to any country which stops producing anything except educational opportunities, medical bills, entertainment and banking, in years when a high national debt must be refinanced at high interest rates.

Chapter III gives us The Theory of Money and of the Foreign Exchanges. Recently INFECTIOUS GREED by Frank Partnoy provided an example, early in his book, of how bankers still don't have any yardstick for figuring out how much they are making when Bankers Trust was trying to figure out how much profit it could declare on trading in the foreign-exchange markets by Andy Krieger in 1987. Being able to bet the assets of a large bank on the direction that a currency would go in 1987 allowed Andy Krieger to get a job with George Soros in April, 1988, where turnabout became his main play. "Krieger reversed the position, and bet against the pound. A single trade with Chemical Bank was for more than $1.8 billion." (Portnoy, p. 33). Really and truly, I think Partnoy blames Krieger for taking stable currencies and earning large bonuses by making them worth much less than they had been worth before he had the option to sell it at a given price. Part IV. The Forward Market in Exchanges in Chapter III of Keynes's MONETARY REFORM attempts to state three practical conclusions. First, hedging a risk won't work when the situation is so bad that there is "a fear of a sudden implosion of exchange regulations or of a moratorium." Partnoy seemed to think that the private trading in derivative contracts was where the big money was made, and public positions in an exchange could be fake positions hedging a bet in the opposite direction, but that there was no law against this kind of manipulation of the market for money. Keynes was more interested in stability. "With free forward markets thus established no merchant need run an exchange risk unless he wishes to, and business might find a stable footing even in a fluctuating world."

Second, there must be money from speculators in such a market for the market to function. "The wide fluctuations . . . have been due, not to the presence of speculation, but to the absence of a sufficient volume of it relatively to the volume of trade."

Third, high interest rates don't matter as much "unless the change in relative money-rates is comparable in magnitude (as it used to be but no longer is) with the possible range of exchange fluctuations.)" Possibly things have changed so much in the last 80 years that Keynes would phrase that differently today.

Chapter IV turns to "the United States, which has enjoyed a gold standard throughout, has suffered as severely as many other countries," but not as badly as Germany and Austria back then.

Rating:
Summary: Some great old ideas, including the famous long run
Review: The Preface of Monetary Reform by John Maynard Keynes is dated October 1923, in a time when there were few economists. As the Preface of this book states this dire aspect of the situation:

"Nowhere do conservative notions consider themselves more in place than in currency ; yet nowhere is the need of innovation more urgent. One is often warned that a scientific treatment of currency questions is impossible because the banking world is intellectually incapable of understanding its own problems. If this is true, the order of Society, which they stand for, will decay. But I do not believe it. What we have lacked is a clear analysis of the real facts, . . ." (p. vi).

There are charts in this book to provide the facts which Keynes was concerned about. Index Numbers of Wholesale Prices Expressed as a Percentage of 1913 on page 5 covers the years 1913 to 1923 (First half-year) for nine nations, looking most outstandingly bad for Germany, which has a final number of 765,000 for half of 1923, far larger than the maximum number of any other country. Italy was at 624 in 1920 and declined to 577 in 1921, still higher than the 510 monthly average that France had in 1920.

A chart at the top of page 18 with dates from 1815 to 1922 is supposed to illustrate "what a splendid investment gilt-edged stocks had been through the century from Waterloo to Mons, even if we omit altogether the abnormal values of 1896-97. Our table shows how the epoch of Diamond Jubilee was the culminating moment in the prosperity of the British middle class." (p. 18). But for people who were concerned about the tumble taken after 1914, things were not so great. "The whole of the improvement of the nineteenth century had been obliterated," (I'm looking at an old edition, so my page numbers might be way off from whatever book you might be able to buy today).

The basic information that is most important to Society as a whole is contained in Chapter I, The Consequences To Society of Changes in the Value of Money, considering separately the interests of the Investing Class, the Business Class, and the Earner. The power of any government which can produce money merely by printing it is considered in Chapter II, Public Finance and Changes in the Value of Money, particularly with respect to Inflation as a Method of Taxation. In order to show that a government might have some choice in such matters, Keynes also considers "Currency Depreciation versus Capital Levy." If this seems like an odd topic now, Keynes is reassuring that such a move might only be considered "when the State's contractual liabilities, fixed in terms of money, have reached an excessive proportion of the national income." This might happen (sooner or later) to any country which stops producing anything except educational opportunities, medical bills, entertainment and banking, in years when a high national debt must be refinanced at high interest rates.

Chapter III gives us The Theory of Money and of the Foreign Exchanges. Recently INFECTIOUS GREED by Frank Partnoy provided an example, early in his book, of how bankers still don't have any yardstick for figuring out how much they are making when Bankers Trust was trying to figure out how much profit it could declare on trading in the foreign-exchange markets by Andy Krieger in 1987. Being able to bet the assets of a large bank on the direction that a currency would go in 1987 allowed Andy Krieger to get a job with George Soros in April, 1988, where turnabout became his main play. "Krieger reversed the position, and bet against the pound. A single trade with Chemical Bank was for more than $1.8 billion." (Portnoy, p. 33). Really and truly, I think Partnoy blames Krieger for taking stable currencies and earning large bonuses by making them worth much less than they had been worth before he had the option to sell it at a given price. Part IV. The Forward Market in Exchanges in Chapter III of Keynes's MONETARY REFORM attempts to state three practical conclusions. First, hedging a risk won't work when the situation is so bad that there is "a fear of a sudden implosion of exchange regulations or of a moratorium." Partnoy seemed to think that the private trading in derivative contracts was where the big money was made, and public positions in an exchange could be fake positions hedging a bet in the opposite direction, but that there was no law against this kind of manipulation of the market for money. Keynes was more interested in stability. "With free forward markets thus established no merchant need run an exchange risk unless he wishes to, and business might find a stable footing even in a fluctuating world."

Second, there must be money from speculators in such a market for the market to function. "The wide fluctuations . . . have been due, not to the presence of speculation, but to the absence of a sufficient volume of it relatively to the volume of trade."

Third, high interest rates don't matter as much "unless the change in relative money-rates is comparable in magnitude (as it used to be but no longer is) with the possible range of exchange fluctuations.)" Possibly things have changed so much in the last 80 years that Keynes would phrase that differently today.

Chapter IV turns to "the United States, which has enjoyed a gold standard throughout, has suffered as severely as many other countries," but not as badly as Germany and Austria back then.