The Late 1990s Fatal Hubris: How the Camp David decisions produced policies that failed to recognize capitalism's intertemporal nature.

• Author: Connolly, Bernard

The Covid-19 epidemic has been a human tragedy. The Keynesian recession and financial collapse in the world which loomed in March 2020 was averted by unusually prompt and effective fiscal and monetary action.

But the pandemic is now provoking economic, political, and social tragedy by instituting the reign of big government and Davos Man--by importing, in effect, a Chinese model of state/crony capitalism into the West. Yet the problem goes deeper than the pandemic. As economists and financial markets agonize about the threat of a return to destructively inflationary conditions in the world, and the United States in particular, the question arises of whether the fatal hubris of the late 1990s, from which so many problems have flowed, was preordained by the Camp David decisions of 1971.

Economist Rudi Dornbusch once wrote that the problem with the world monetary order is not that there are too many currencies but that there are too many countries. The monetary order is less important than the democratic order, which requires national sovereignty. But Rudi put his finger on what was the true great fault in the classical gold standard.

In the rapidly changing global dynamics of the final third of the nineteenth century and the beginning of the twentieth century, very high rates of return on capital in what a hundred years later would be called "emerging markets"--very importantly initially including the United States and subsequently including Tsarist Russia--put upward pressure on world real interest rates (relative to a baseline). This created severe economic difficulties, with attendant social and political strains, in the more mature economies, notably Britain, France, and Belgium, and subsequently imperial Germany. As real interest rates rose in those mature economies, mainly via falling prices, there were pressures there to boost rates of return to match those in emerging markets. The results--cartelization; protectionism; an intensified and competitive search for colonization opportunities; increased conflict between capital and labor; union militancy and the rise of socialist parties--certainly contributed to the slide towards the First World War (and of course in the United States the robber barons had already gained sway by the 1890s).

Given the classical gold standard, the only way to avoid economic strains and divisions leading to conflict would have been the dystopian nightmare of world government (one in fact now being imposed by totalitarian wokeism). One can see...