Sasha: “Of course that Austrian business cycle explains trade imbalances that occur between businesses – and these imbalances are the greatest between countries (especially if one is experiencing the artificial boom and the other one is not).”

Gee, I must be as ignorant as you clame. I’ve read quite a bit of Mises, Rothbard and Hayek and never once saw that they tied the ABCT to trade deficits between countries. Please cite a reference for me where they do that.

Sasha:”Check out what Austrians have to say:”

I hate to point this out to you, but did you notice that the quote from Rothbard never mentioned that consumer goods production will decrease. All it said was that investment would shrink. Producers will continue to produce consumer goods with the capital already invested. If investment shrinks, that means nothing more than that the growth of consumer goods production will slow.

Sasha: “If you don’t know which question about inflation during 1960s/1970s these graphs are answering, then you have issues that are far more serious then your obvious ignorance of Austrian economic theory.”

Look at the graphs again. They show levels of money, not changes in the supply of money. We measure monetary inflation as the change in the money supply from year to year. Of course the money supply level grows from year to year and is always larger in later years than earlier ones. But if you look at a chart of money supply inflation, which is the change in the money supply from year to year, you’ll find that the rate of growth in the money supply in the decades of the 60′s and 70′s was about 5 times greater than in the 90′s until today. It’s that growth rate in the money supply that most economists refer to when talking about monetary inflation.

Sasha: “Also, had inflation during 1960s and 1970s were any lower, who says that American account surplus would not have been higher back then?”

I addressed that above and you ignored me again. You have to explain what incredible phenomena broke inflation’s ability to generate such huge trade deficits as those we enjoy today.

This is getting boring. Unless you add a little creativity to your insults, I’m afraid I’ll have to quit responding.

I hope that RogerM will see that rate of growth was not 5 times greater during 1959-1980, as opposed to 1980-2001.

What’s more important is that inflation (production of new money) does not affect economy in some “rate of change” — but it affects it with the amount of produced dollars.

For example, if my stock of currency increases from $1,800 to $3,600 in one year, you can’t argue that my spending will have a greater effect than following year when currency increases from $3,600 to $7,000.

However, I’m still waiting the promised data about CREDIT inflation, since I only talked about that.

Correction: “since I only talked about that, when it comes to malinvestments”…

========

I don’t know if I explained my position clearly enough for young readers… I hope this will be a better response to poor RogerM:

Before someone starts claiming that the person who gets a raise from $20,000/year to $40,000/year is better off than a person who gets a raise from $1 million/year to $1.7 million/year… bear this in mind:

“Rates of inflation” were produced by statist economists, who tried to measure it by rates of changes in general price level — instead of simply tracking the increase in the amount of currency from year to year, and than seeing how much these increases changed over time (second derivative). From 1959 to 1980, average annual increase in currency was circa $73 billion. From 1980 to 2001 that average annual increase was circa $258 billions!

That’s your real increase in monetary inflation! If you want to observe inflation in terms of rates of change — changes in inflation will be measured by the second derivative of the monetary stock. If you declare the rate of monetary inflation as a factor in malinvestments, why don’t you simply observe how inflation (rate of change) increased over time.

HOWEVER,

I’m actually helping out RogerM! I claim that these dramatic changes in rate of inflation did not cause changes in production structure. As Rothbard and Hayek explained — it is the credit inflation (expansion) that causes these distortions.

PS
We really don’t need another lame response from you Roger. I think you said enough with your “knowledge” of the ABCT.

A nation has a TRADE DEFICIT when the cost of merchandise imports exceeds the receipts from merchandise exports. The CURRENT ACCOUNT balance encompasses merchandise, service items, commodities, and “current” financial transactions; while the BALANCE OF PAYMENTS includes the entire above plus capital flow items; all transactions involving foreign exchange.

The foreign exchange value of any currency is determined by the supply of and the demand for that particular currency. In international financial analysis supply and demand take on an unique role; for what is demand form our point of view is supply from the standpoint of foreigners – and vice versa. All transactions that require the conversion of foreign currencies into dollars constitute a demand for dollars. These include exports, payments received for serves rendered to foreigners, interest and dividends collected from foreigners, etc. An increase in the volume of any one of these times will increase the demand for dollars and, ceteris paribus, the foreign exchange value of the dollar. The opposite types of transactions, imports, etc., which involve payments to foreigners increase the supply of dollars and thereby reduce the foreign exchange value of the dollar.

There is no “flow” of money internationally, only offsetting debits and credits on the books of the financial institutions involved in financing trade or other transactions. A slight modification of this statement is necessary to take account of the movement of paper and coin currencies. Their contribution to surpluses or deficits is extremely minor and short run, when not actually offsetting.

In foreign exchange supply always equals demand at the current rates of exchange. International debits equal international credits. The balance of payments always balances since there can be no credit transfer of funds.

When the balance of payments is balanced by foreigners acquiring net holdings of our equities, bonds, and real estate, and capital outflows (interest, dividends, rentals, etc.) exceed inflows, we are either decreasing our net creditor position in the world, or increasing our net debtor position. Beginning 1985 it has been the latter. The trade deficits, plus the unilateral transfers of funds by the Federal Government to foreigners, transformed this country from this world’s largest creditor to the world’s largest debtor – for the first time since 1917. Since 1985 we now have a net debtor position exceeding 5.7 trillion dollars, but the principle villain (since 1973) has been our dependence on foreign oil.

Trade deficits at any particular time for any given country can be beneficial or harmful; can represent economic strength or weakness. In the period before Worlds War I the U.S. had mostly trade deficits. We were a debtor country – and we thrived. Foreign investments accelerated our economic development and our standard of living rose faster as a consequence.

By the end of World War I the U.S. was a creditor nation, but we refused to act like one. We opted for tariffs and other restrictions on imports, rather than free trade. Capped by the sky-high Hawley-Smoot tariff of 1931, U.S. trade policy was an important contributor to the world wide depression of the 1930′s. By 1933 there was not a single major nation on the gold standard except the U.S.

The situation was further exacerbated when Roosevelt and his Treasury Secretary, Morgenthau, exercising the crisis powers delegated to the executive branch by Congress, took the U.S. off the gold standard in April, 1933 by making the dollar inconvertible into gold at a fixed price. And to make matters worse they periodically kept raising the price of gold from $20.67 per ounce to a final price in Dec. 1933 of $35. This had the effect of depreciating the exchange value of the dollar. All of this was done by a creditor nation operating with a chronic surplus in its balance of payments.

The Bretton Woods Agreement of 1944 established, amoung other things, the International Monetary Fund and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreign and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreigners but not to U.S. nationals.

In 1949, the U.S. dollar was not only as “good as gold”, but it was also preferred over gold. There were not enough dollars to finance the legitimate needs of the world economy. So, the chronic balance of payments deficits which began in 1950 were for a number of years beneficial to the world economy and to the U.S. Because of our large and chronic balance of payments surpluses after World War II, foreigners were unable to accumulate sufficient dollar balances to efficiently finance world trade. These balances were desperately needed because of the total dominance of the dollar as the reserve custodian, standard of value and transactions currency of the world.

The Korean Conflict (1950-1953) temporarily solved the problem but, the longer term solution consisted in implementing our “containment policy” against the U.S.S.R. This involved the establishment of approximately 700 military bases, not only around the perimeter of the Soviet Union but throughout the world. We have paid hundreds of billions of dollars to foreigners to acquire the bases and to maintain a garrison of more than 400,000 military personnel abroad. With diminishing merchandise surpluses this policy proved to be financial overkill.

By the mid 1960′s foreigners found themselves in possession of excessive dollar balances, excessive in terms of the needs of trade. Some of these excess dollars came to be used as “prudential” reserves in the formation and growth of the Euro-dollar banking system. Since 1970, the “western” world has functioned within a system of essentially free exchanges. Before 1973, exchange rates were in terms of a “fixed target”. Now the dollar is a “moving target”.

The Korean War, which began in June, 1950, initiated the chronic balance of payments deficits that persist to this time and which will probably continue as long as foreigners are willing to increase their net investments in this country.

The U.S. has had a net liquidity deficit in every year since 1950 (with the exception of 1957), Up to 1976 (when the private sector contributed its first trade deficit ) these deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel). During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.

Although the dollar ceased to be freely convertible in March, 1968, institutional (central bank practices) and attitudinal lags were sufficient to offset, until late 1970, the excessive expansion in the supply of dollars. In August 1971, all convertibility was ended. This further accelerated the decline in the exchange value of the dollar. All fluctuations in exchange rates prior to this time were the result of other currencies changing in value relative to the dollar.

During the early seventies of the Nixon administration the dollar was twice devalued, raising the fictional price of gold to c. $41-43. These were non-events. When the dollar was no longer on a gold standard (after March, 1968), the dollar price of gold was determined by the open market. In response to the devaluations, the Federal Reserve Banks marked up the balance sheet values of their holdings of gold certificates. These were also nonevents; since the capacity of the Reserve banks to create credit (acquire Treasury Bills, etc. by creating Interbank Demand Deposits) was unaffected; nor did the devaluations alter the capacity of the fed to pay out Federal Reserve Notes in exchange for these IBDDs.

From late 1970 to 1978, the dollar depreciated relative to other major currencies. .

After the “Marshall Plan”, which did not produce a balance-of-payments deficit, most of this aid was in the form of various types of military assistance, or to maintain our numerous foreign stations and bases, and to finance approximately 400,000 military personnel abroad; except for the Korean and Vietnam wars, which more than doubled that figure. The policy that engendered the outlay of trillions of dollars for these purposes was called dollars for these purposes was called “containment”, i.e., containment of the U.S.S.R.

High interest rates kept international demand for dollars strong and the dollar’s foreign exchange value high. In turn, the strong U.S. dollar-which only began to decline in value in the mid-1980s-made U.S. goods expensive abroad and imports relatively cheap at home. As a result, the United States registered an ominously large and growing trade deficit. In 1980 the annual U.S. merchandise trade deficit was $25,500 million; by 1986 it had ballooned to $144,500 million

By the end of the cold war in 1990, the United States still maintained 395 major military bases and hundreds of smaller installations around the world. Most of the bases are part of military alliances formed to contain communism. By 1990, 435,000 American troops, 168,000 Defense Department civilians and 400,000 family dependents were living on foreign bases. Another 47,000 sailors and Marines were stationed aboard ships in foreign waters. A million Americans abroad were on the Defense Department payroll.

Even if we eliminated the trade deficit and ran a surplus sufficient to service our foreign debt, the dollar would still decline because of the war/containment/terrorist deficit. Since actions sufficient to eliminate these deficits are highly improbable, the dollar will eventually decline to a level which will eliminate them. At that level our standard of living, for this and other reasons including financing the federal debt, will be much lower than at present, and the capacity of the Pentagon to project conventional military power abroad will be severely circumscribed.

We have observed, given the situation of this country in the 19th century, (its people government and undeveloped resources) that it was advantageous both to lenders and borrowers for the U.S. to run a trade deficit.

Conversely it is also economically advantageous for creditor nations, and for the world economy, if creditor nations operate with trade deficits: deficits proportionate to their creditor status. This is, the deficits should be large enough to enable the nationals of debtor nations to acquire a sufficient amount of foreign exchange to enable them to serve their international debts.

Since the U.S. is no longer an economically undeveloped nation, but is increasingly an international debtor, what evaluation should be places on our huge trade and current account deficits? For the very short run these deficits keep prices and interest rates lower than they otherwise would be and they subsidize our standard of living. But the deficits also are inexorably forcing the dollar down in terms of its foreign exchange value—and no consortium of central bankers, treasury secretaries, et al. can stop the process

With a chronically depreciating dollar foreigners will be much less inclined to invest in the U.S. on a creditor ship basis, thus pushing up interest rates. The rising cost and diminishing volume of imports will contribute to an increase in inflation, and the expectation of further inflation will also push up interest rates. This spells stagflation.

Under pressure from this country, the Pacific Rim, Oil Exporting, etc., central bankers try to support the dollar. They do not try to arrest the long-term downtrend of the dollar, but seek to erase some of the unnecessary short-term and destabilizing fluctuations. This is a correct statement of what the function of the central bank should be where the objective is to influence rates of exchange.

The net accounting effect of the Chinese buying U.S. dollars is 1) the importer pays in his own country’s currency, 2) the exporter receives payment in his country’s currency, 3) for very debit there is a credit, 4) there is no net transfer of funds, and 5) money is not flowing in or out of the respective countries. This is proved by using “T” accounts. The balance of payments always balances even though the statistics on payment balances never do. To correct this deficiency, the commerce Department inserts an item called “Errors and Omissions”. Thus, the triumph of theory over “facts”.

The Chinese loss of income and probable exchange rate losses, when the reverse of these operations is consummated at a later date, are, of course, compensated by the Federal Reserve. The adverse effects on the Chinese economy receive no such compensation.

For all of this reason, the policy of the U.S. Treasury and the Federal Reserve is to minimize overt intervention in the foreign exchange markets.

Although the lags are sometimes unusually long between exchange rate changes and the changes in volume and value of trade, the present situation cannot be explained by these lags.

Trade restrictions have some effect, but the U.S. is not immune from subsidizing exports and using numerous devious devices by the Customs Service to restrict imports.

A weak currency is not a cause; rather it is a symptom of a weak, noncompetitive economy. In time, of course, a declining dollar will eliminate the deficit in our balance-of-trade. But the price exacted will be a sharp decline in imports, principally oil, and the purchase of foreign services, reflecting our relative poverty and inability to compete in the international economy. The fact that we are the world’s number one producer of smart bombs will not arrest that trend.

The real culprit seems to be the cost of our products relative to their quality. Inferior quality is not a good buy at any price. We are even getting a reputation for inferior products.

For the people of limited foresight, which apparently includes a substantial majority, debt expansion can be very exhilarating. One’s standard of living can take a quantum leap forward. Taxpayers are currently being subsidized, in terms of taxes not paid, more than 248 billion annually. It is called the federal deficit. Consumers are being subsidized by approximately $763.6 billion annually, of which, 494 billion is for oil. It is called the foreign trade deficit. In the longer term the problem of servicing all this debt, consumer, corporate, and federal poses daunting problems. And that is a gross understatement. These circumstances, as we know, are of our own making. The country has not been invaded, and our productive resources have not been destroyed, or even impaired, by national calamities.

In foreign trade, imports decrease the money supply of the importing country (U.S.) while exports increase the money supply, and the potential money supply, of the exporting country (China). Purchasing the deficit countries currency and then purchasing U.S. treasury bills (1.0663 trillion by year ending 2006), will reduce the dollar’s supply, but it is important to know that sooner or later the Chinese central bank will have to reverse their positions and the foreign exchange dealers know this (gold will rise at this juncture).

The trade-off of reducing the pressure on the global dollar by temporarily decreasing the volume of the dollars requiring conversion into Yaun, is the cost of foisting an inflationary policy on China. Obviously, and for good reason, the Chinese have reason to resist this kind of assistance.

Wanting to retain a competitive advantage, and keep the Yaun low, and exports high, as China is export dependent for full employment, the Chinese “sterilize” their foreign exchange reserves. That is, the Chinese “mop up” the increase in the Yaun money supply by selling government bonds. This converts surplus Yaun into government debt and delays the inflationary impact of an otherwise increase in the volume of Yuan. But at some future point, as exchange rate reserves grow, the Chinese capital markets will lose their ability to absorb new debt.

Eventually, China’s protectionism (currency peg) will crack, and the volume of Yuan will fuel inflation. Meanwhile the Chinese have been desperately 1) selling lots of government bonds to their domestic credit markets, and 2) raising commercial bank reserve ratios (to monetize the debt). Both 1 & 2 are to “sterilize” their foreign exchange reserves, and postpone the inevitable. If there is a flight from the dollar, it will be because the Chinese waited too long to realign the Yuan. And as a sign post, the U.S. National Association of Manufacturers estimates the Yuan is currently undervalued by as much as 40 percent.

Note: Analyst claim that the Chinese $1.202 (mar07) U.S. foreign exchange reserves could buy Microsoft, Citibank, and ExxonMobil Corp. as well as General Motors and Ford. And Japan had $915 (apr07) in U.S. foreign exchange reserves, Eurozone $451, Russia $372…

While the U.S. will have a temporary gain, as will foreign enterprises engaged in foreign trade who are momentarily freed from excessive fluctuations in the exchange rate, the overall financial effects are a loss to the Chinese and to the Chinese economy. The Chinese central bank suffered a balance-sheet loss of 26 billion Yuan ($3.3 billion) because of currency movements.

No country has become and remained a world power if it is a world debtor and has a weak currency. From these unwanted events we can expect a vicious level of stagflation that will become an enduring feature of our economic landscape. And the United States will be forced into a high degree of economic isolation, and operate under a command economy and perhaps into an increasingly totalitarian mold.

What’s missing from contemporary analyses: This is the dollars fate:

Russia, formally the epitome of state controlled economies, did not use the ruble in its foreign exchange operations. Since all trade with the Soviets was monolithic, it was to their advantage to establish a single money center bank through which all foreign financing could be channeled. Their London bank was one of the first to become a part of the Euro-dollar system, an unregulated system of money creating banks operating on the principle of prudential reserves, as contrasted to regulated legal reserves. These prudential reserves are liquid balances in the U.S., or any other major currency country.

If the bank’s balance is inadequate to meet a specific payment it borrows in the London money market at or new the LIBOR rate (the London Interbank Offering Rate), a rate substantially below the prime rates of most banks. U.S. money center banks were often criticized for loaning money “to other countries” at a lower rate than it would offer local customers.

With respect to the U.S., all transactions were financed through the Amtorg Trading Corporation which transfers all of its receipts to, and draws all of its drafts on the London bank. The only concern of the London bank with fluctuating exchange rates is to have a minimum inventory of a depreciating currency.

A common misconception is that Euro-dollars (E-Ds) are U.S. dollars that have somehow contrived to leave this country, whereas in fact all E-Ds are created abroad. The foreign commercial banks, and foreign branches of U.S. banks, which create this money, operate on the premise that they will always be able to convert E-Ds into U.S. dollars on demand on a one-to-one basis.

This exchange equivalence privilege may suggest to the E-D borrower that there is no meaningful difference between E-Ds and U.S. dollars. But in terms of our national and the international economy this is an illusion. In both an economic and legal sense the E-D is no more a part of the lawful money supply of the U.S. than is the Canadian dollar, or any other national currency.

Two principal factors were responsible for the origin of the E-D banking system; (1) the possession by foreign commercial banks of an excess volume of short-term claims against the U.S. dollar, and (2) the preeminence (at that time) of the U.S. dollar as the reserve, standard-of-value, and transactions currency of the world.

Beginning in 1950 the U.S. incurred the first of a chronic series of net liquidity deficits in its balance of payments. These deficits have grown in magnitude and continued uninterrupted ever since 1950 with the exception of 1957. By the mid sixties foreign banks had acquired more dollar balances than were required to cover their own international transaction needs – so they started lending their excess U.S. dollar balances: which contribute to Bernanke’s global savings glut; & Greenspan’s conundrum, i.e., artificially low interest rates).

E-D banking originated in the City of London and London based banks still dominate the E-D banking system. As the number of banks participating in the E-D transactions increased (G7), the E-D bankers discovered that the E-D deposits they created for borrowers often did not result in any diminution of their U.S. dollar balances – the System was merely shifting balances within itself. That is, drafts drawn on E-D banks increasingly were deposited in other E-D banks. Thus was laid the economic basis of an international system of “prudential” reserve banking – the discovery that the amount of actual U.S. dollar reserves required to support the E-D loans made – and E-D deposits (money) created.

The prudential reserves of the E-D banks consist of various U.S. dollar-denominated liquid assets (U.S. Treasury bills, U.S. commercial bank CDs, Repurchase Agreements, etc.) and interbank demand deposits held in U.S. banks. These are liquid balances in the U.S., or any other major currency country. If a bank’s balance is inadequate to meet a specific payment in the E-D system, it borrows in the London money market at or near the LIBOR rate (the London Interbank Offering Rate), a rate substantially below the prime rates of most banks. By both promulgating excessive money and credit creation and avoiding statutory reserve requirements, E-D banks are able to preserve their competitive advantages with lower interest rate loans.

The volume of prudential reserves held by each E-D bank presumably is dictated by “prudence” – not by any legal requirement administered by a monetary authority. All prudential reserve banking systems have heretofore “come a cropper”. Money creation by private profit institutions is not self-regulatory- the “unseen hand” simply does not function in this area. Invariably the systems created too much money, speculation became rampant, inflation distorted and destroyed economic relationships, confidence that the banks could meet their convertibility obligations eroded, “runs” on the banks caused mass banking failures, and entire economies were left in ruin.

With this historical record to draw from the pertinent question is: Why did the various governments and monetary authorities allow E-D banking to grow on an unregulated, prudential reserve basis? The situation obviously required that the E-D banks be constrained in their money creating activities through the standard devices of legal reserves and reserve ratios, the volume and level of which are controllable by the monetary authorities. There is no assurance, of course, that the monetary authorities having such powers will use them to prevent and excessive creation of money.

Until the early sixties there was a chronic shortage of U.S., dollars available to finance international transactions. But the E-D system came about precisely because the U.S. balance of payments deficits had finally supplied a more than adequate volume of international liquidity (fed continuously by U.S. trade deficits). The E-D has been a superfluous and harmful addition to the world’s monetary stocks and E-D bankers have increased their earnings assets by approximately this addition.. This figure is many times the U.S. means-of-payment money supply.

China holds the largest foreign exchange reserves, much of which are denominated in US currency. Such deposits are now available in many countries worldwide, but they continue to be referred to as “Eurodollars” regardless of the location, Yaun-dollars, Yen-dollars, Petro-dollars, foreign-dollars (U.S. trading partners), etc., are now contributing to this excess.

This vast addition to the world’s money supply has substantially contributed to the high rates of inflation that have prevailed since 1965 with U.S. trading partners. Nor can the E-D be defended as being in any way superior to the U.S. dollar as an international reserve and transactions currency since the acceptability of the E-D is totally dependent on the acceptability of the U.S. dollar.

If the E-D system is not to repeat the tragic record of all previous prudential reserve banking systems two thins are necessary: (1) the U.S. dollar must remain acceptable as the world’s transactions currency (This requires that the chronic deficits in the U.S. balance of payments cease), and (2) the E-D system must be subjected to the restraints of controllable legal reserves and reserve ratios.

But this is only the beginning. After the legal structure has been put in place we will still need monetary authorities who understand the economics of money creation, the consequences of excessive money creation – and are willing to force on the governments and business communities of their respective countries the discipline of a properly regulated money supply. The latter problem will be with us whether control is vested in the central bankers, or the International Monetary Fund is made a world central bank and control of the E-D is vested in it.

But the alternative is, at some point in time, a flight from the U.S. dollar and, therefore, the Euro-dollar. This will generate hyperinflation in terms of U.S. and Euro-dollars, and an international financial crisis of unprecedented proportions. If history is a guide it is obvious these requisite conditions will not be achieved.

Euro-dollars, Yen-dollars, Yuan-dollars, Petro-dollars, foreign-dollars
cross-border flow
Our situation requires measures be taken which will reverse the deterioration of the dollar’s integrity. Otherwise, the dollar’s acceptability as an international reserve currency will further erode. What is required is no less than an end to the chronic liquidity deficits in our balance of payments, and a halt to the excessive creation of U.S. and Euro-credit dollars. This task will prove to be extremely difficult. But the alternative is, at some point in time, a flight from the U.S. dollar and, therefore, the Euro-dollar. This will generate hyperinflation in terms of U.S. and Euro-dollars, and an international financial crisis of unprecendented proportions.

Russia, formally the epitome of state controlled economies, did not use the ruble in its foreign exchange operations. Since all trade with the Soviets was monolithic, it was to their advantage to establish a single money center bank through which all foreign financing could be channeled. Their London bank was one of the first to become a part of the Euro-dollar system; an unregulated system of money creating banks operating on the principle of prudential reserves, as contrasted to regulated legal reserves.

These prudential reserves are liquid balances in the London money market at or new the LIBOR rate (the London Interbank Offering Rate), a rate substantially below the prime rates of most banks. U.S. money center banks were often criticized for loaning money “to other countries” at a lower rate than it would offer local customers.

With respect to the U.S., all transactions were financed through the Amtorg Trading Corporation which transfers all of its receipts to, and draws all of its drafts on the London bank. The only concern of the London bank with fluctuating exchange rates is to have a minimum inventory of a depreciating currency.

Since the demise of the Bretton Woods System the dollar ceased to be the currency around which all other currencies revolved. Changes in exchange rates were negotiated by governments, usually through the offices of the International Monetary Fund. Rates now are determined in the open market subject to all the vicissitudes of a competitive market. Consequently the market registers many unwarranted speculative fluctuations. These fluctuations unnecessarily increase the costs and risk of doing business.
All of the tools at the disposal of the central banks have a limited and short term effect. Direct participation of central banks in foreign exchange markets alters, of course, the actual volume of a currency offered in the market. But central bank purchases have an inflationary effect on their domestic economies, since purchases supply added legal reserves to their domestic banks. Obviously these operations may not conform to the optimum monetary policy of these countries, and consequently have to be reversed sooner or later.

If we wish to stabilize the dollar or increase its value, it will be necessary to eliminate our trade deficits, and reduce drastically the expenses the federal government incurs in the financing of our foreign policy.

In the beginning there was one M, then three, then five; (M4 & M5), then “L”, “Debt”, MZM, & OCD, etc. It would be a burden to enumerate the components of these various concepts of money.

From the standpoint of monetary authorities, charged with the responsibility of regulating the money supply, none of the definitions make sense. The definitions include numerous items over which the Fed has little or no control, including many the Fed need not and should not control. The definitions also assume there are numerous degrees of “moneyness”, thus confusing liquidity with money (money is the “yardstick” by which the liquidity of all other assets is measured).

The definitions also ignore the fact that some liquid assets have direct one-to-one relationship to the volume of transaction deposits (TR’s), while others affect only the velocity of TR’s. The former requires direct regulation, the latter simply is important data for the Fed to use in regulating the money supply.

2) Money should be defined exclusively in terms of its means-of-payment attributes. The present array of interest-bearing checking accounts has confused the distinction between means-of-payment accounts and saving-investment accounts and created a dilemma as to what portion, if any, of these interest-bearing accounts should be considered as savings. This dilemma is resolved if transactions velocity is taken into account; i.e., TR is analyzed in terms of monetary flows (MVt). No money supply figure standing alone is adequate as a guide to monetary policy.

From the monetary authority’s point of view, money has to be confined to assets that constitute means-of-payment and are controllable. Currency is not such an asset. Fortunately it is an asset the Fed does not, should not, and cannot control. There is no inflationary bias in an expansion of currency, and the deflationary bias resulting from its growth, can, and is, offset through the expansion of Reserve Bank credit.

The Fed’s original definition of M3 was mud pie (mixed, i.e., double counts the supply of loan funds as money). And M2 was muck before it: because M3 contained M2, M3 was already contaminated.

The Fed discontinued M3 because there was no correlation or there were better correlations with the other aggregates than between M3 and nominal gdp. This shouldn’t be a surprise because M3 includes both money that has been spent (the supply of loan funds) and the supply of money. Thereby M3 significantly overstates the supply of money by double counting the supply of loan funds from the thrifts.

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