It is not easy for the average person to make much sense out of the current international monetary system. It works something like a poker game. Everyone at the table has some chips. The green ones are supposed to be exchangeable at a ratio of 35 to one with the yellow chips. About half way into the game, the other players notice that the host has a machine at his feet that keeps popping out green chips every few minutes. Apparently the yellow chips can’t be cranked out this way, but the green ones can. So the host keeps on betting on every hand — deuces, fives, anything — and he keeps offering green chips to pay for staying in the game.
Now why would anyone in his right mind play a game like this? Well, for one thing, at present it is the only game in town. Second, the host’s name is Don Corleone, and it is not easy to leave while you’re ahead. He makes you an offer you just can’t refuse.
For example, he just says, “I hear you need protection.” In contemporary international affairs, the concept is generally referred to as “support for NATO,” but basically it is protection. So several of the players stay in the game.
The trouble really comes when somebody tries to get the host to exchange 35 green chips for one of the yellow chips. “I keep the yellow chips right here,” he says. “All right, I am a reasonable man; we can say that the yellow chip is now worth 42 green ones. Only do not try to exchange your green chips. The yellow chips stay right here.”
Under these circumstances, there is only one way to stay in the game competitively. All the players have to get one of those green chip machines. So they do. And no one, but no one, gives out any yellow chips for green chips.
And that is the international monetary system. Anyone got a pair of jacks to open?
The setting was the aftermath of President Nixon’s unilateral abolition of the gold exchange standard on August 15, 1971. He also floated the dollar, meaning he annulled fixed exchange rates. That ended the Bretton Woods agreement of 1945, which went into into effect in 1947. In the same speech he froze wages and prices for 90 days. The controls lasted until 1974. They led to massive shortages, especially gasoline. Before the year was over, OPEC quadrupled oil prices.
The government promised to restore fixed exchange rates in December of 1972. It violated that promise. Rates floated for good after January 1973.
My speech was in response to a presentation by Prof. Robert Triffin of Yale University. Triffin was the designer of the Triffin Plan, much heralded at the time, but not implemented. He had been promoting it for 15 years. It involved abandoning the gold standard and substituting digital money issued by the International Monetary Fund. This went back to a 1943 proposal by John Maynard Keynes, an idea that was rejected by the Bretton Woods agreement. In other words, it was “paper gold” issued by an international bureaucracy. I regarded the idea as clap-trap. But I figured the best way to deal with him was with some humor.
There were speeches by big-shot economists. There was Sir Roy Harrod, who never earned a Ph.D. in economics, but who at least had a B.A. in history. He was Keynes’s close buddy and biographer. He had been a very influential economist in Great Britain, because he edited The Economic Journal from 1945-1961, so he could accept or reject articles. He could make or break academic careers. He had clout.
There was Fritz Machlup of Princeton, an Austrian School economist who defected from the position in the early 1940s, thereby enabling him to get a job at Princeton.
There was Henry Reuss, the chairman of the House Banking Committee, who never had a clue about monetary theory.
With poo-bahs like that in the room, I figured a little playful ridicule was appropriate. As St. Augustine wrote in 430 A.D., ridicule is appropriate when you are dealing with something ridiculous.
Also at the conference was Henry Hazlitt, who never went to college, and who knew more about economics than anyone in the room.
The proceedings were published as Toward a New World Monetary System, edited by C. G. Wiegand (Engineering and Mining Journal/McGraw-Hill, 1973). My essay appears on page 70.
The system is still the poker game I described.