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Keynesian Economics
- Paul Volker came out with a speech titled “The Rediscovery of the Business Cycle” in 1979 explaining that Keynesian Economics was a failed system: “The new economics has failed.”
- When Keynesian Economics was born, the USA had a balanced budget, so it made sense to at that time to raise interest rates to stop the citizens from spending. But today the biggest borrower in the world is the government. When interest rates are raised, we the people take out fewer loans and spend less, but the government never takes that factor into consideration as it’s not “their money.”
The Debt Limit
- It was created in 1917 for WW1, but they never gave it back. They came out with more and more “Liberty Bonds” until 1933 when Roosevelt defaulted on the gold clauses.
- It went all the way to the Supreme Court (Perry vs US) where it was ruled that what Rosevelt did was unconstitutional, but the government ignored that ruling because no one made them stop.
- By doing this Roosevelt not only violated the constitution, but also devalued the US dollar. Roosevelt sold these war bonds at the gold rate of $20.67, he then raised the price of gold to $35, but refused to pay the buyers of those war bonds in the promised gold and told all of the debt buyers “screw you” and basically “You’ll take these devalued dollars or nothing!” The buyers of these 4th “gold backed” bonds, lost 70% of their international value!
- Perry v. United States (1935) was a significant Supreme Court case that dealt with Congress’s authority to alter federal debt obligations. The case arose during the Great Depression when Congress tried to invalidate the “gold clauses” in government bonds. Many U.S. government bonds contained “gold clauses” that promised to repay bondholders in gold coins or their equivalent value. During the Great Depression, Congress passed a resolution canceling these gold clauses as part of broader monetary reforms that took the U.S. off the gold standard.
- The Supreme Court ruled in Perry v. United States that:
- Congress could not constitutionally repudiate its own debt obligations
- However, since Congress had banned private ownership of gold, bondholders couldn’t actually receive gold coins
- The bondholders hadn’t suffered any actual damages since the paper money they received had the same purchasing power as the promised gold would have had.