Hayek Tells Bill Buckley That Even Keynes Was Afraid of the Keynesians
Last month Bob Roddis caused a stir when he made available the audio recording of Hayek’s 1975 “Meet the Press” appearance.
Well Roddis has done it again. He has provided me with this recording (mp3) of Hayek on Bill Buckley’s Firing Line. Buckley asks Hayek about the popularity of Keynesianism, if (as Hayek claimed) it was so “manifestly ill-adviiiiised” (picture Buckley’s scary eye rolling).
Let me map what Hayek says, because it gets a little tricky in the middle but the ending is amazing. Hayek explains that in Great Britain during World War I, the pound was cut loose from gold, leading to large increases in prices and wages. Then after the war, the British government wanted to return to pre-war parity. Prices generally came down, but nominal wage rates remained high. Thus, workers saw a huge increase in their real wages because of the efforts at deflation (needed to go back on the gold standard at the old parity).
So, in order to prevent widespread unemployment (i.e. allow British workers to be competitive with the rest of the world), they either had to lower nominal wages or raise prices again. Hayek explains that the first option was politically unpopular, and also was–according to a complicated argument from Keynes’ General Theory–not even effective. (I.e. Keynes argued in his book that even if all nominal wages fell, that might end up reducing overall prices and hence not lead to a fall in real wages.)
But now the awesome part. Hayek says that Keynes’ theory was, at best, appropriate for the specific deflationary environment of the 1930s. After the war had passed, the great danger was inflation. And–according to Hayek–Keynes himself agreed with this, and even promised to rein in his foolish disciples if they ever got the crazy notion to advocate pump-priming in an inflationary environment. But alas, Keynes died six months after pledging this to Hayek.
As I said, Hayek sounds like he’s rambling for a bit, but try to stay focused because the end of the clip is really incredible.
What happened to the mp3 clip of Hayek & Buckley?
I think a better way to phrase Hayek’s point would be to say that when Churchill tied Sterling back to gold in 1924 at the prewar parity (after the huge expansion of the £ money supply in WW1 having caused each unit of ” to be worth far less in terms of gold) each note was consequently overvalued relative to gold and therefore forex exchanges with gold converting into Sterling currency at the official Bank of England rate cost an excessive amount making British prices too high in gold as they were pumped up by consistent expansion of Sterling media even after the return to gold backing at the prewar parity thus preventing the appreciation of the pound that was necessary unless the BoE would stop passing off new bank notes as backed by gold while fixing the price of Sterling to gold. This of course caused a shortage of foreign gold inflows and consequently awful exports, and this is used as a really pathetic strawman argument against gold as Mises points out while discussing this egregious episode in his introduction to the third volume of The Theory of Money and Credit. As it is transcribed here and explained by Hayek it is simply not correct; if prices had been falling and if Trade Union force had been combated (Keynes’ argument being that it could not be combated) then British real wages would have fell to purchaseable levels because the costs of exporting from Britain would have been lowered but alas, the money media was not shrinking in supply and was exchanged for gold at an officially overvalued rate, which is the problem of a Gold Exchange Standard as opposed to printing notes ONLY when they represent a saved portion of gold so that all money is either gold or a certificate for gold that is simply left elsewhere, and which can be claimed by receipt of the note. Though such a system relies on gold bankers not printing notes without receiving new specie. It’s basically a fairytale system upheld by government, in a truly free market no-one would use many certificates for deposited precious metals!