In the 2008 presidential primary season, candidate Ron Paul highlighted the gold standard as a major part of his campaign, prompting many Americans to ask: What is the gold standard? In short, the gold standard dictates that the value of our currency is determined by the value of gold. In such troubled financial times, would a return to the gold standard bring us back to a strong and stable economy, or usher in yet another economic disaster?
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First off the Jeffersonian quote is not real in the first post.(look it up in the Virgina University library it has no basis, Yes I was bummed to) Secondly, I will put forth a qoute by Thomas Jefferson that can be validated. Jefferson said "To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, ‘the guarantee to every one of a free exercise of his industry, & the fruits acquired by it.'"[3] (Thomas Jefferson: translation of Destutt de Tracy's Treatise on Political Economy) The reason that this quote is of the utmost imortance is because without a solid and confirmed monetary value redistibution of wealth from a person who worked for it, and earned it rightfully, is a crime that can be committed unnoticed. There is truth in the idea that inflation and deflation can deprive men of their wealth, and this idea extends to the lowest income all the way to the highest. For example, if you watch the silver and gold markets at all you will have noticed that as of three months ago the silver sot price was at $24 some odd dollars an ounce. Now in December 10, 2010 Silver spot prive is at $28.68 a ounce. If you are smart and link the Federal Reserves actions in those three months to what the silver spot price is doing in dollars then you will notice that the Federal reserve has printed over 800 Billion dallars to buy back foreighn debt in that time span. The result was a $4.00+ jump in metalic spot price for silver. So hence, Gold standard or not, the dollar is tyed to metallic value because the dollar also declined in exchange value with other countries in this time period. Furhermore, would you rather trust the value of what you hold in your pocket or the bankers we have all seen leech us for years? The current monitary controllers in the United States are Bankers, often known as the Federal Reserve. The board of the Federal Reserve consists of 12 bank presidents that controll the economics of the 12 areas the Federal Reserve has divided the country into. So would you rather trust the Bankers or would you rather have faith in the fact that you have $1 of silver in your pocket? By the way one dollar of silver today is worth $28.68 dollars, even though it used to be a dollar of silver was worth one dollar. So before you are so eager to through the metallic standard out the window, please think on this and the drastic fluxuations that the dollar has seen in rescent years since the gold standard was thrown out the window.
Like the Euro we need to regulate the Fed on how much money they can print and tell congress they don't have the checkbook to keep writing/funding earmarks into laws. I think adherance to a standard would drastically save the US...It would cut the hemoraging the country long since needs....We must fix inflation or at least regulat it to the point that the criminals running the show cant just turn on the press every time things get tough.
The economic meltdown has been called everything but what it really is: a currency crisis.
Trade, especially international trade, requires a stable medium of exchange. When currencies trade like dot com stocks in the late 90s, trade must eventually come to a screeching halt.
For example, say you want to import $100 million worth of steel from Europe. If you are operating on thin profit margins, a sudden move in exchange rates can wipe out your profits before the ink is dry on the contract.
The standard argument is, "Gee, but you can always hedge the currency.". Sure you can. The problem is the more volatile the trade in currencies, the higher the premium on hedging transactions. These are not nice people, giving away free money. Traders in currency contracts expect to make a profit, and they charge a premium that reflects risks in current markets. If the risk is high, as it is now, so is the premium.
The purpose of a gold standard is to fix the value of money. In other words, the dollar you earned 20 years ago should be worth the same amount in gold today as it was then. A gold standard also eliminates a government's ability to issue, what for all practical purposes, is counterfeit money - money that is not backed by anything of real value.
An international gold standard provides a way out of the mess we're in today. The problem is decades of unrestricted printing of fiat money has created a global currency supply orders of magnitute higher than the gold needed to back it. If every ounce of gold ever mined were matched to the current currency supply, gold would be trading at over $112,000 per ounce.
In order to convert to a gold standard today, it would be necessary to create a massive gold bubble and fix the exchange rate at the top. Instead of the policies of the past to fix gold at an artificially low rate, it would be necessary to fix gold prices at a rate in the $100K+ rate mentioned above. The result would be a wealth creating bubble, that could be locked in at the top, without the usual deflationary bursting that we've seen with real estate, dot com stocks, oil, etc..
A return to a gold standard is the only way out. It simply is not possible to borrow your way out of debt. You have to create enough wealth to wipe out the debt.
It seems likely a gold standard will come about in any case as the world's economies continue to deteriorate. In a few year's time, those with things with real value to trade will no longer be willing to accpet things with no real value in exchange. If you want to import $100 million in the steel example above, you'd better be prepared to pay for it with gold.
Returning to a gold standard is pointless because the GDP cannot be tied to the value of one metal in some artificial manner to reflect the condition of the economy.
Once the US dollar was severed from the gold standard, other nations followed suit - and there is no going back. Either all free-market economies would have to return, or none; one tiny nation producing next to nothing could start hoarding gold and become a meaningless economic "superpower". The only ability that nation would have is to manipulate economies as the nation saw fit, depending on political alliances etc. Tying prices of internationally traded commodities like steel and chemicals to valueless opinions and beliefs would spell disaster for producing nations.
Gold today is a commodity product, useful in a number of technical applications in electronics and medicine and becoming useful for new applications in commodity chemicals manufacture (nanogold). The stuff isn't currency, and a misguided yearning to return to the glorious days of the Roman Empire isn't an appropriate way to operate a modern economy.
Returning to the gold standard probably can't happen do to globalization. However, for those of us who would prefer it a 'personal gold standard' of sorts is possible. Own good old solid, touchable gold instead of the illusion of wealth aka stocks.
What do you want the gold for? You want it for exchange purposes, don't you. That means you need to barter your gold against something considered acceptable for your counterpart. Unless you carry all your coins in your pocket, you will need a "symbol" of the gold you have somewhere...and as fungible (this symbol) will be object of any kind of trade possibilities.
You might have a paper testifying you are the owner of X amount of gold deposited in some place...from the moment you accept such document you are in the realm of trust and promises...
The bank where your hard gold rests might not have it in vault at the moment you requested it, so what if the government decides to declare moratorium on gold deliveries?
The problem is not with gold o paper money, is with the governments.
They have the power to confiscate anybodies wealth at will.
To tie the increase in amount of money to the amount of new gold that can be grubbed from the ground is a bad idea. In times of economic growth, it ensures that inadequate money growth will limit our potential. The result would be deflation as too many needs chase an inadequate money supply. If we should happen to find a whole new source of gold, then we would have inflation problems.
The problem of gold leaving the country would be a whole other issue. The mercantilism of past govts has caused great harm around the world. Our own colonial times were marked by a shortage of currency that hampered trade and growth.
We have made a lot of mistakes under our present system. But locking ourselves into something that has no relation to the potential of our economy isn't an answer. We have been on the gold standard for most of the history of our country. Economic cycles were more extreme, and the ability to react reduced by that fact.
Economic cycles were far milder when we were on the gold standard (except for the early Roosevelt years; the severity of the Great Depression was the result of Roosevelt's anti value-production policies. Value was simply not being produced during the Roosevelt years).
At any rate, your other objections could be addressed by a multi-metallic standard. No one government can gain a monopoly on all the metals.
When the pace of change was slow, there were still bad panics - often causing cascading bank failures. A Fed on a gold standard would have limited ability to prevent. But the more relevant case would be the late 1800s when innovation, new technology, and changing norms were remaking society. The panics then were especially severe - on the order of the Great Depression.
As far as multi-metalism, it was tried also. All that does is bankrupt the nation as everyone arbitrages an arbitrary relationship that can't change with market forces. And, of course, it can't change because a gold/metal standard that continually revalues its basis is no standard at all.
"When the pace of change was slow, there were still bad panics - often causing cascading bank failures. A Fed on a gold standard would have limited ability to prevent."
Last time I checked it was the Federal Reserve that actually CAUSED some of these very crises:
http://mises.org/story/3165
"As far as multi-metalism, it was tried also. All that does is bankrupt the nation as everyone arbitrages an arbitrary relationship that can't change with market forces."
Why would it need to? Can't free banking achieve these changes anyways?
"And, of course, it can't change because a gold/metal standard that continually revalues its basis is no standard at all."
The price of Gold was perfectly stable while we were on the gold standard, though today's inflation tends to distort this fact:
http://www.wisegeek.com/what-is-the-historical-price-of-gold.htm
that's what the gold standard is after all. It is the price of everything else that is at risk. When the economy grows faster than the supply of gold, you have deflation. When new supplies are discovered, you can have inflation. A country on a gold standard is helpless to shape monetary policy to events by the very nature of the beast.
There were major panics before the establishment of the Federal Reserve - some worse than the Great Depression. For most of this time, deflation rather than inflation was the problem. A rapidly expanding country produced wealth far in excess of the incremental amount of gold grubbed from the ground. Debt would fill in the gaps for a bit, but when confidence was shaken, every one demanded payment in gold - and since there wasn't enough gold to go around, deflation took hold.
A gold standard also encourages mercantilism - hoarding gold. The result is what many European countries did with colonization. They attempted to export as much as possible for gold while not importing. This 'beggar thy neighbor' policy resulted in reducing trade and the overall creation of wealth.
"It is the price of everything else that is at risk. When the economy grows faster than the supply of gold, you have deflation."
Right, so the value of a dollar would be gaining in value. Nothing wrong with that.
http://mises.org/books/deflationandliberty.pdf
"When new supplies are discovered, you can have inflation. A country on a gold standard is helpless to shape monetary policy to events by the very nature of the beast."
Seeing how the FED has handled everything else in the context of monetary policy, I think the lack of control over money supply might actually be a good thing:
http://www.mises.org/books/moneyproduction.pdf
http://mises.org/books/fed.pdf
BTW: Are you calling the market a beast?
"There were major panics before the establishment of the Federal Reserve - some worse than the Great Depression."
Like when???
"For most of this time, deflation rather than inflation was the problem. A rapidly expanding country produced wealth far in excess of the incremental amount of gold grubbed from the ground."
If your talking about the great depression, your wrong; the Fed nearly doubled the money supply during that time frame and contracted it, leading to the depression itself:
http://www.econlib.org/library/Enc/FederalReserveSystem.html (see "The Federal Reserve System During the 1920's")
Otherwise, if you're talking about a period that was supposedly worse than the depression, then I would like to know what that time frame was. And there's nothing wrong with deflation at the rate that it typically occurred under a gold standard.
http://209.85.173.132/search?q=cache:YK3ptvVpHEMJ: www.capmag.com/article.asp %3FID%3D2555+myth+deflation&hl=en&ct=clnk&cd=5&gl=us
(sorry it was only available in a Google cache)
"Debt would fill in the gaps for a bit, but when confidence was shaken, every one demanded payment in gold - and since there wasn't enough gold to go around, deflation took hold."
The deflation is a good thing but as for the issue of gold demands, this is only a problem with fractional reserve banking systems, not ones with a 100% gold standard. On another note, the federal government gave conflicting requirements for what banks needed to have in their reserves (in terms of gold) to back up their currency. In other words, some banks were required to have 40% of their notes backed up by gold, others required to have 35%, etc. None reached the 100% threshold intended by the forefathers.
"A gold standard also encourages mercantilism - hoarding gold."
How so? If it's simply used as a backing for currency then what difference does it make?
"The result is what many European countries did with colonization. They attempted to export as much gold as possible for gold while not importing. This 'beggar thy neighbor' policy resulted in reducing trade and the overall creation of wealth."
Can you give me a link to this? If my memory is correct, the founding fathers all agreed that paper money was NOT something to be issued for it's lack of backing, and the inflation that resulted from fiat money meant that existing wealth in the hands of the working class was destroyed as every new dollar entered the market (like what we see today).
1- In a close economy, that means: without foreign trade (of goods or money or assets), you might be right...partially.
There will be no "heating economy" because growth will be limited by de money available, ane because money cann't grow following real economy, we all will be poorer, and always behind potential growth that used to comes out technology impact in production process.
At the same time, limits to growth, will translate into competitiveness losses for the country.
On the other hand, all the subsidies structure will colapse under the cost of subsidies. Which means that agriculture, and vertical alinied production processes, will be harmed.
Money is a contract dear, no a value storage any more. As a contract, is as good as the productive structure and insurances behind it.
For value storage purposes capitalism has developed many other instruments.
Paper money, a contract too, incorporates real economy situation, while gold-money can't...it's precisely your point: money as a neutral unalterable stable value storage instrument.
But that besides impossible, is undesirable too...such money would reduce innovation potential, technological development pace...which introduces unexpected tourmoil in production always...so as in real live dear.
"In a close economy, that means: without foreign trade (of goods or money or assets), you might be right...partially."
I honestly don't see how this is in anyway relevant to the comment you've replied to.
"There will be no "heating economy" because growth will be limited by de money available, ane because money cann't grow following real economy, we all will be poorer, and always behind potential growth that used to comes out technology impact in production process."
Let's see if I can decrypt what point you're trying to get across here. You seem to be saying that the growth of an economy is somehow "limited" to the money in circulation. This is incorrect:
http://mises.org/Controls/Media/MediaPlayer.aspx?Id=2495
In this lecture Joe Salerno explains that historically the US economy has grown just fine under a gold standard even under periods of deflation. The only consequence to having the same level of currency in circulation is that the existing money GAINS VALUE. Nothing harmful or dangerous about that.
"At the same time, limits to growth, will translate into competitiveness losses for the country."
Say it with me:
Deflation is not a limit on a growing economy. Deflation is not a limit on a growing economy. Deflation is not a limit on a growing economy. Deflation is not a limit on a growing economy.
http://mises.org/article.aspx?Id=1040
"On the other hand, all the subsidies structure will colapse under the cost of subsidies."
I wish I could scream it at you in person: Where the hell did I ever mention anything about subsidies????
"Which means that agriculture, and vertical alinied production processes, will be harmed."
Now that you've brought up something completely unrelated to what was discussed in my comment (you know, the one you replied to?), I may as well point out that subsidies do not help agriculture in any way whatsoever:
http://www.cato-at-liberty.org/2007/08/02/life-without-farm-subsidies /
"Money is a contract dear, no a value storage any more. As a contract, is as good as the productive structure and insurances behind it."
No comprendo. If your saying money is only as good as the structure and basis for it then you sure as hell better fight for a gold standard.
"Paper money, a contract too, incorporates real economy situation, while gold-money can't...it's precisely your point: money as a neutral unalterable stable value storage instrument."
See the above points on deflation, you wouldn't need an increased money supply to suffice for a developing economy.
"But that besides impossible, is undesirable too...such money would reduce innovation potential, technological development pace...which introduces unexpected tourmoil in production always...so as in real live dear."
How would it reduce innovation potential? Seems like it worked a helluva lot better then the continentals used in early colonial times.
Dear Miss (Sir)
1- Money is a tool, as a pen or paper to a poem. Shakeaspeare is for a poem what the economy is for money.
2- No social order in history could commit to such rigidities (on values, whether morals or monetary or technological) and survive. Please provide one example of sistemi efficiency based of fixed money. There is any. Even social live in small aboriginal closed economies appeal for transactions to many moneys.
3- Value (any kind of value) reflect reality, and because reality is a man made disaster, no tool (jail or corssette) could stop or encourage "irrational exhuberance". (EX: Relevance of relational capital and family provides explanations for aboriginal behavior of depletion of scarce resources: simbolic meaning of festivities proves that -see for detailed proves "Non Zero. The logic of human destiny" by Robert Wright-).
4- Closer to the production frontier scarcity appears, and technology became the only solution for growth. But keep in mind that technology appears also from strategical need of rival firms.
In a fixed standard scheme money supply for investment depends on savings...and that calls for money shortages. Money dont follow the economy, the economy becames slave of its servant.
Take a look on this paper by Jones & Obstfeld (available at the NBER Nr W6103).
"This paper revises pre-World War II current account data for thirteen countries by treating gold flows on a consistent basis. The standard historical data sources often fail to distinguish between monetary gold exports, which are capital-account credits, and nonmonetary gold exports, which are current-account credits. The paper also adjusts historical investment data to account for changes in inventories. The revised data are used to construct estimates of saving and investment over the period from 1850 to 1945. Our methodology for removing monetary gold flows from the current account leads naturally to a gold-standard version of the Feldstein-Horioka hypothesis on capital mobility. The regression results are in broad agreement with those of Eichengreen, who found a significantly positive cross-sectional correlation between saving and investment even during some periods when the gold standard prevailed. Despite reaching broadly similar conclusions, we estimate correlations between saving and investment that are somewhat lower and less significant than those Eichengreen found. In particular, we find that in comparison to other interwar subsamples, the saving-investment correlation is markedly low during the fleeting years of a revived world gold standard, 1925-1930."
So, to tie growth to past productive structure is a grave mistake.
Stability is expected, and desirable, for graveyards, and some gases.
"Money is a tool, as a pen or paper to a poem. Shakeaspeare is for a poem what the economy is for money."
Abstract, but true. I can understand where you're coming from.
"No social order in history could commit to such rigidities (on values, whether morals or monetary or technological) and survive."
The US managed to do this pretty well until the introduction of fiat currency. Not to mention other civilizations which used a form of currency that couldn't just get printed out of thin air.
"Please provide one example of sistemi efficiency based of fixed money."
See the above point.
"There is any. Even social live in small aboriginal closed economies appeal for transactions to many moneys."
I cannot understand what you're saying here. Please rephrase.
OK, in reading the rest of your comment I can't say I really understand enough of it to reply to much of it. I'll try and decode it later.
Only you complain about clarity...so, it is your problema amigo.
But for the sake of conver(tion)sation (and an apostolic pulsation of mine)...
1- Money seems to be for you kind of an object when it is a construct. That's the reason why I appeal to synecdoche. To show the sphere of competence of the item called money. This abstraction mistake appears to me being the source of all your mistakes, and of empiricist old-austrians's too.
"In philosophy of science, a 'construct' is an ideal object (i.e., one whose existence depends on a subject's mind), as opposed to "real objects" (i.e., those whose existence is non dependent on a subject's mind).[1] Hence, concepts (such as those designated by the sign '3' or the word 'liberty'), hypotheses (such as that designated by the sentence "Evolutionary theory refers to individuals and populations"), theories (e.g., evolutionary theory), classifications (e.g., biological taxonomy) and other conceptual items are constructs, while biologists, foxes, philosophers, rocks, computers, and pencils, among many other, are not constructs but real objects (or real things)."
Your conception about money is a daughter of the physics of beginings of XXth century, when "duality" as presented by wave-particle (Bohr-Planck) model correct Rutherford's...bringing certain esotherics into a supposed hard-science.
2- Your point 2 regarding the "happyplanet" of many monies in the US is completely false.
The follwing piece comes from:
www.frbsf.org/publications/federalreserve/annual/1995/history.html
Free Banking Era
In 1791 the Bank of the United States received a charter to operate until 1811, followed by the Second Bank of the United States from 1816 to 1836. These two banks, chartered by Congress rather than a state, performed several central bank functions. Although privately owned, they were authorized to issue paper bank notes and serve as the fiscal agent of the government. Both banks, however, were unpopular with those wanting easy credit--primarily the western, agrarian interests--and in 1832 Andrew Jackson vetoed the recharter of the Second Bank.
Thus followed the "Free Banking Era"--a quarter century in which American banking was a hodgepodge of state-chartered banks with no federal regulation or uniformity in operating laws. State Bank notes of various sizes, shapes, and designs were in circulation. Some of them were relatively safe and exchanged for par value and others were relatively worthless as speculators and counterfeiters flourished. By 1860, an estimated 8,000 different state banks were circulating "wildcat" or "broken" bank notes in denominations from ½ cent to $20,000. The nickname "wildcat" referred to banks in mountainous and other remote regions that were said to be more accessible to wildcats than customers, making it difficult for people to redeem these notes. The "broken" bank notes took their name from the frequency with which some of the banks failed, or went broke.
Does not sounds very happy to me...
3- The rest of your observations can be refined if You follow the reading suggestions.
Please feel free to react...
But they seem to be more philosophically oriented than grounded in experience. To look at your points:
There is a great deal wrong with deflation. A dollar that constantly gains in value relative to most other assets makes currency an investment in addition to its traditional roles of facilitator of transactions and store of wealth. That encourages hoarding and delaying transactions since falling prices will make things cheaper in the future. I am somewhat perplexed by your not understanding the concept. Under a gold standard, money can only be issued to represent gold owned. If the economy is growing at 5% while the gold supply only grows at 2%, then it should be clear that money will become more valuable relative to non-monetary assets. As the supply of money shrinks relative to the real economy, it distorts all transactions.
If you think deflation is a good idea, ask the Japanese about their 'Lost Decade'. Deflation was part of that as consumers delayed purchases assuming prices would fall. Politically also, deflation is a losing proposition.
The panic I referred to was the panic of 1893. Speculation was certainly a large part of the initial crisis. But as events moved forward, gold was demanded by both foreign and domestic creditors. Under a gold standard, losing gold automatically contracted the money supply worsening the situation. Trade was impeded and contracts could not be fulfilled because of a lack of currency. Once again, different people find different reasons for its ending. But the Klondike gold strike - which injected a tremendous amount of gold into our economy - just happened to coincide with it's ending.
Wikipedia has an adequate article on mercantilism.
As for the founding fathers, they wrote nothing about the gold standard, paper money, etc into either the Articles of Confederation or the Constitution. The original founding of a central bank was very controversial - and undone. Our first Treasury Secretary, Hamilton, was a hard money man, but his was by no means a universal position.
Our revolution was financed partly by Continental Bonds with no backing. With no central bank, private banks issued their own currency. Gresham's Law was an observation on the complexities of people having to try to decide whose currency was good - and whose wasn't. There is a substantial difference between allowing every state and bank to issue its own currency and a gold standard.
Finally, it is especially ridiculous to think that inflation is a special curse of the workers. Inflation devalues financial assets. The inflation of the 60-70s wreaked havoc on the savings of worker retirees and trust-fund babies alike. People profited by owning houses or real property - and gold as well. People just starting out (as I was then) could do quite well by borrowing and then paying back in cheaper dollars. It was people with savings who lost.
If you know anything of history, then you know that working class folks have never been big fans of a rigorous gold standard because it works against their interests. Whether you look at the Grange or the labor movement, or William Jenning Bryan, you would be hard pressed to find a populist who embraces a gold standard.
"Finally, it is especially ridiculous to think that inflation is a special curse of the workers. Inflation devalues financial assets. The inflation of the 60-70s wreaked havoc on the savings of worker retirees and trust-fund babies alike."
Isn't this claim just one big contradiction with the main point you're getting across? Are you simply admitting that inflation affects more than just the workers?
"People profited by owning houses or real property - and gold as well. People just starting out (as I was then) could do quite well by borrowing and then paying back in cheaper dollars. It was people with savings who lost."
Except the "profit" was close to meaningless if the purchasing power of that money went down. And the interest rate of banks when you borrow from them is supposed to compensate for inflation if they really cared about remaining in business. As for the people with savings, I agree.
"If you know anything of history, then you know that working class folks have never been big fans of a rigorous gold standard because it works against their interests."
I know from history and experience that if the money supply is allowed to increase then the process goes something like this: 1. The Fed prints money and craps it out of nowhere.
2. Money printed and used by the Fed suffers no immediate effects from inflation because the market hasn't raised prices until after the new money has entered it.
3. After a few transactions the market becomes aware that there is more money available and thus they can raise prices on their goods.
4. As a result, middle class individuals have less purchasing power with the money they have, the prices of basic wants and necessities has increased and only after executives at their job site raise their wages (realizing after some time that such a thing will not be a detriment since they are raising the prices of their goods/services due to inflation).
5. Because wages are the last thing to adapt to an inflated money supply the middle class thus far suffer the most, while the Fed suffers nothing at all from printing money out of thin air.
6. All five of the above points make a strong case that inflation is basically a hidden tax, and that a commodity-based currency that is disciplined by an existing precious good in the market will help to end this problem.
"Whether you look at the Grange or the labor movement, or William Jenning Bryan, you would be hard pressed to find a populist who embraces a gold standard."
They should('ve). Under a gold standard (or any commodity based standard in general) the whole process I mentioned above would start from the bottom up, forcing the Federal Government to actually balance the budget, and also allowing people at the bottom of the inflation cycle to (if the value of the dollar changes at all) GAIN spending power as time goes by.
http://www.5min.com/Video/How-the-Federal-Reserve-Created-the-US-Recession-39529721
http://video.google.com/videosearch?q=federal +reserve&emb=1&aq=0&oq=federal#
http://video.google.com/videosearch?q=federal +reserve&emb=1&aq=0&oq=federal#
You seem to think that people through the ages haven't been able to determine their own best interest. That view is generally held by those who don't suffer the consequences of their actions. Farmers, factory workers, etc have always favored inflation politically. Hence my comment that many of your sources were based on philosophy rather than history. You can prove anything if you don't have to back it up in the real world. But then since we live in the real world, I consider that the final arbiter of fact. Deflation favors the wealthy. They already have money, and it gives them a return just on that basis.
As for your comment on the middle class's money - you miss the point of a modern economy. Money hoarded doesn't produce the same growth as money invested. If you get a return from just holding bullion - or its equivalent - then you increase the hurdle rate for all other investments. A growing economy will suffer from a lack of investment for that reason. People trying to create wealth are handicapped.
As for the Japanese comment - I referred to the Lost Decade, not the bubble before it. Do you know the difference? One was characterized by rapid asset value inflation - and one by deflation. Once the deflationary mindset set in, it was very difficult to get the investment cycle going again as people deferred purchases waiting for lower prices and investments because the economy wasn't growing.
I am not sure if you misread my words from haste, ignorance or maliciousness. I spoke of the first US central bank, not the Federal Reserve. The section of the US Constitution referring to money refers only to states, not the US Government, and did not hinder individual enterprises from issuing their own notes. I don't have the time of inclination to address it all, but I recognize arguments that see only what they want to see.
You dismiss history and experience in favor of what you 'know'. But the basic issue is, a modern economy demands money in relation to transaction and wealth storage needs. Too little money is as destructive as too much. Being human, people do make mistakes - on both sides. The Great Depression was aggravated by too little money just as the Fed's response to the first OPEC oil shock was the creation of too much money. I find no place in your progression for Volcker's actions of the 80's. It is totally inconsistent with your theory, but still seems to have happened.
Your solution is to lock money supply to a physical commodity. Don't you see how silly that is in an information economy? If a primary purpose of money is to facilitate transactions, then tying the supply of money to an independent variable is counterproductive. I would prefer a currency based on electricity to gold. At least that would have some relation to economic activity.
Damn those word limits!
Anyways....
"I am not sure if you misread my words from haste, ignorance or maliciousness."
Sh*t, I misread you? Sorry man...
"I spoke of the first US central bank, not the Federal Reserve."
They're both central banks, right?
"The section of the US Constitution referring to money refers only to states, not the US Government..."
So you at least agree that the Fed is unconstitutional and that only states are granted the power to issue currency. That's a start.
"...and did not hinder individual enterprises from issuing their own notes."
Of course it didn't, that's the point I was trying to get across. Things have clearly gone off track since the days when banks could create their own notes, something now illegal.
"I don't have the time of inclination to address it all, but I recognize arguments that see only what they want to see."
Then I guess we both have something in common beyond the obvious factors.
"You dismiss history and experience in favor of what you 'know'."
There's really not much of a difference at all.
"But the basic issue is, a modern economy demands money in relation to transaction and wealth storage needs."
Why so if you can just divide up a dollar after it's purchasing power increases?
"Too little money is as destructive as too much."
Except deflation doesn't operate in the same way inflation does as a hidden tax. The people at the bottom whose wages are the last thing to adjust to an increased monetary supply suffer the most.
"The Great Depression was aggravated by too little money..."
This was after the Fed doubled the money supply by the way and THEN decided to contract it.
"...just as the Fed's response to the first OPEC oil shock was the creation of too much money."
So we both agree the Fed isn't anywhere near perfect with the economy.
"I find no place in your progression for Volcker's actions of the 80's. It is totally inconsistent with your theory, but still seems to have happened."
It ended the stagflation, nothing wrong with that. I don't see much of a reason to be surprised at the business cycle that occurred under his command though.
"Your solution is to lock money supply to a physical commodity. Don't you see how silly that is in an information economy?"
Wouldn't an information economy make it more viable?
"If a primary purpose of money is to facilitate transactions, then tying the supply of money to an independent variable is counterproductive."
Not at all, see the points below.
"I would prefer a currency based on electricity to gold. At least that would have some relation to economic activity."
Not a stupid idea, but that would make inflation/deflation more erratic wouldn't it?
Now here's an article that I want you to take the time to read and point out specific criticisms.
http://mises.org/story/1241
It makes some pretty interesting points on the claim that deflation causes people to save and save only, along with the notion that loans are harder to pay back under deflation. This is mostly elaborated after the quote from Martin Wolk of MSNBC. Prediction: you will ignore the article and say it's either too abstract or too philosophical.
You might be interested to see what they say about deflation. It's pretty much the accepted view.
http://online.wsj.com/article/SB123387097831254101.html
I particularly agree with the comments that while your money may go farther, in the main there will so much less of it, standards of living decline. Money is means, not an end. And if a philosophy of managing it reduces the standards of living, it a bad thing in my book.
I enjoyed it as I enjoyed The Work of Nations by Robert Reich. It was a clever cherry-picking to hype a thesis that isn't supported by broader scrutiny.The author melds price decreases from efficiency gains with those from decreased demand. I found it intellectually dishonest how he glossed over the difference.
To start with, the author gave prime placement to computers and the Industrial Revolution. Both were the result of new technologies that I don't really see as having any relation to monetary issues. One took place under a gold standard; the other during the period of fiat money the author so dislikes. I think we can all agree that if we could subject the economy to Moore's Law and double its size every 18 months, that would be a good thing. But we can't, and the author provides no linkage how either example was affected by or affected monetary policy.
It seems we both agree that efficiency through investment is a good thing. We also seem to agree that a gold standard is deflationary. The open question is one of how to optimize investment and maximize wealth creation. Your author posits that deflation is actually good for investment and wealth creation. But this country had a number of inflationary and deflationary periods over it's history. The historical record is VERY clear that during deflation investment declines markedly and economic growth suffers. I would be interested in any examples you have of monetary deflation increasing growth absent exogenous factors like an Industrial Revolution.
The linkages of why deflation depresses investment are fairly easy. If I am to invest X amount of gold in something with an output other than gold, I will have to value that later return in terms of the more valuable gold. That clearly increases my hurdle rate and must depress investment.
Your article says, "In economics, it is a good rule that what is good for individuals and families is also good for the economy". That is so opposite conventional economic theory as to spark the question of whether the author understands the difference between mico and macro economics. That doesn't make it wrong, but to be taken seriously, it needs to be supported.
The author points out the micro benefits of deflation - lower expenses and savings lasting longer without acknowledging the macro consequences. Deflation is associated with diminished demand that depresses output and wealth. The lowered prices of inadequate demand are different from those of efficiency gains and result in inadequate return on investment. These feed a self-reinforcing cycle of increasing unemployment and depressed activity. This has been the history of depressions and under a gold standard there are fewer tools to manage it. I would be pleased to consider any examples you have contradicting that conventional wisdom.
Using gold as a sole standard of wealth was a prime mover in the most destructive aspects of mercantilism. If gold must underpin currency, then the only way to avoid the pain of deflation is a beggar-thy-neighbor policy of spurring exports and discouraging imports to accumulate more gold to increase money in circulation. This is hardly a way to maximize global - or local - wealth or optimize investment.
Would you agree that a goal of money is to facilitate transactions for the social good of investment and wealth? If so, wouldn't it be true that there is a optimum level or range of money for a given economy? If you accept these, can you tell me why - other than historical tradition - any rational policy would link money supply to gold?
The only one I can think of is that NO ONE can be trusted to do a better job than a 'dead hand'. But during the period since the delinking (and while the Federal Reserve existed before the Depression, the country was still on the gold standard), the US economy has prospered. While unfair for many reasons, taking the period since WWII as typical, economic growth has been higher and recessions shorter and milder than previously in US history.
You asked me to review your article. I have tried to provide historical and intellectual examples of how I think things work and why. I have also shown why I think the Mises Institute is distorting reality to fit its philosophy. Deflation can exist even with fiat money. Japan's Lost Decade is about the only example I can think of however. This is the best article I have seen on how they recovered:
http://www.iht.com/articles/2008/12/01/business/col02.php
I am always interested in real examples and real intellectual underpinnings of how things work. I am not against the gold standard for any other reason than I think we can do better - and have in the main. Gold made sense when both its supply and growth were very slow. It was portable, durable, and couldn't be counterfeited. But after the Industrial Revolution, economic growth accelerated and the supply of gold couldn't keep pace. Therefore, we need something better.
As for everything else...
"You seem to think that people through the ages haven't been able to determine their own best interest."
I disagree, I believe people are more than capable of providing for themselves on a wide variety of needs and ideals. Such as the founding fathers and their desire for a gold monetary system.
"That view is generally held by those who don't suffer the consequences of their actions."
Like the Federal Reserve and the respective corporate banking institutions that make up the Fed.
"Farmers, factory workers, etc have always favored inflation politically."
Two things: Not everyone is a farmer or a factory worker, and secondly the fact that many farmers and factory workers want inflation does not mean they know based on grounded fact that such a thing is good for them. At best, all it does is reduce the spending power of every dollar they have. If there is some significant reason that I'm not aware of that motivates them to support increased inflation then I would like to hear it.
"Hence my comment that many of your sources were based on philosophy rather than history."
You're joking, the articles I cited on the great depression and the effects of deflation and the case against the Federal Reserve and........................all of it was philosophy based and not historical? How is this so?
"You can prove anything if you don't have to back it up in the real world."
At least we can agree on something.
"Deflation favors the wealthy. They already have money, and it gives them a return just on that basis."
Inflation favors the wealthy. They are the first people to get new money in a market and thus are not suffering from reduced spending power. Deflation gives the middle class the ability to expect greater returns in their wages and not have to worry about rising costs of living that always come before raised wages. Did I mention that the return the wealthy would actually get (if any) would also get passed down to their employees?
"As for your comment on the middle class's money - you miss the point of a modern economy. Money hoarded doesn't produce the same growth as money invested."
Where the hell did I say otherwise??? Of course money invested will give you a better return, and if you have a dollar that slightly gains value over time then naturally an investment will compound that increase in spending power.
"If you get a return from just holding bullion - or its equivalent - then you increase the hurdle rate for all other investments."
You mean holding onto MONEY in and of itself. If you invest that money then you'll get a compound return from both deflation and the actual investment itself.
"A growing economy will suffer from a lack of investment for that reason. People trying to create wealth are handicapped."
OK then, ellaborate a little more on just how a gold standard would cut down on investments; this seems to be a key issue for the claim that a gold standard slows economic growth. I don't see why money that stays the same or gains in value hampers this.
"As for the Japanese comment - I referred to the Lost Decade, not the bubble before it. Do you know the difference? One was characterized by rapid asset value inflation - and one by deflation. Once the deflationary mindset set in, it was very difficult to get the investment cycle going again as people deferred purchases waiting for lower prices and investments because the economy wasn't growing."
They waited for lower prices simply BECAUSE the economy wasn't growing? If this is supposedly dependent on the claim that a gold standard halts money production and thus the growth of an entire economy then this is false; a sustained monetary supply with respect to a growing economy doesn't affect transactions negatively because people don't have "dollars," Nonetheless, this business cycle would've been solved ahead of time had the initial inflation and changes in interest rates never happened in the first place. Here's an overview of how business cycles work:
http://www.lewrockwell.com/rothbard/business-cycle.html
http://mises.org/article.aspx?Id=606
It never helps to have any kind of inflation followed by a contraction in the money supply, that's for sure.
"But they seem to be more philosophically oriented than grounded in experience."
How would you draw the line then?
"There is a great deal wrong with deflation. A dollar that constantly gains in value....."
OH S#&@!!!
THE MONEY THE MIDDLE CLASS ARE SAVING UP IS INCREASING IN VALUE! OMFG!!! THAT'S DEFINITELY THE SUM OF ALL FEARS THERE!!!
Wait, hang on....
"...relative to most other assets makes currency an investment in addition to its traditional roles of facilitator of transactions and store of wealth."
So saving becomes an investment. Lots to worry about there.
"That encourages hoarding and delaying transactions since falling prices will make things cheaper in the future."
So everything gets cheaper, and people become more aware of the fact that everything is gaining in extrinsic value. Again, this sounds like the perfect jump start to any economic infrastructure that I'm aware of. Sure as hell beats the hyperinflation in Zimbabwe: http://www.cato.org/pub_display.php?pub_id=8232
"I am somewhat perplexed by your not understanding the concept."
I'm perplexed too, I have the crazy radical illogical belief that money gaining in value is more helpful to the economy than money that continues to lose purchasing power.
"Under a gold standard, money can only be issued to represent gold owned."
Fantastic! Money cannot be printed out of thin air and will also have some form of intrinsic value to it. Sure keeps a good restrain on the crap the Federal Reserve loves to put us through with fiat money: http://www.cato.org/pub_display.php?pub_id=9790
"If the economy is growing at 5% while the gold supply only grows at 2%, then it should be clear that money will become more valuable relative to non-monetary assets."
So the money I have in my bank account will increase in purchasing power??? I guess one good argument would be that such a prospect sounds too good to be true (but it isn't!).
"As the supply of money shrinks relative to the real economy, it distorts all transactions."
How, and if so I can guarantee that such distortions aren't nearly as bad as the boom and bust we experience under current inflation rates.
"If you think deflation is a good idea, ask the Japanese about their 'Lost Decade'. Deflation was part of that as consumers delayed purchases assuming prices would fall."
Here's my main source for what supposedly happened: http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
According to this link:
"The Japanese asset price bubble was an economic bubble in Japan from 1986 to 1990, in which real estate and stock prices greatly inflated."
Prices suffered from inflation, not deflation. Unless wikipedia is totally biased.
Also: http://mises.org/article.aspx?Id=626
"Politically also, deflation is a losing proposition."
Primarily because big government programs would become harder to fund since they cannot spend money that doesn't exist at the inflationary expense of working class individuals.
"The panic I referred to was the panic of 1893. Speculation was certainly a large part of the initial crisis. But as events moved forward, gold was demanded by both foreign and domestic creditors. Under a gold standard, losing gold automatically contracted the money supply worsening the situation."
How was this gold lost (e.g., why did creditors want it), and how did deflation result in worsening the situation independent from all other factors?
"Trade was impeded and contracts could not be fulfilled because of a lack of currency."
There is no "lack of currency" under a gold standard; money gains in value and can easily be divided up to satisfy monetary needs. For instance, if the money supply deflates resulting in $1,000 becoming as valuable as $1,250, then this means that you can sustain a thousand dollar deal without the need for more currency since the existing currency now has more purchasing power. A contract costing a thousand dollars would now only need $800 if we ended up with the same deflation as $1K gaining the same value as $1.25K.
Onto part two, since comments over 5K characters are not allowed. :(
"Once again, different people find different reasons for its ending. But the Klondike gold strike - which injected a tremendous amount of gold into our economy - just happened to coincide with it's ending."
Probably because it gave less incentive for banks to issue money by means of a fractional reserve system since they no longer needed to print money out of thin air; it thus became easier to back up their notes. Again, a fractional reserve system is NOT a 100% gold standard by any measure.
"Wikipedia has an adequate article on mercantilism."
I'm sure they do. So did my history book.
"As for the founding fathers, they wrote nothing about the gold standard, paper money, etc into either the Articles of Confederation or the Constitution."
You're f@%#ing me now: http://www.gold-eagle.com/editorials_03/holloway011303.html
"The original founding of a central bank was very controversial - and undone."
The Federal Reserve as a WHOLE is a central bank, so you can't say it was undone.
"Our first Treasury Secretary, Hamilton, was a hard money man, but his was by no means a universal position."
Unfortunately you're right.
"Our revolution was financed partly by Continental Bonds with no backing."
And naturally after they saw the result of paper fiat currency they embedded into the constitution direct instructions on what kind of money they intended for the US. The entire history of it is documented here:
http://www.gold-eagle.com/editorials_03/holloway011303.html
http://www.gold-eagle.com/editorials_03/holloway012003.html
http://www.gold-eagle.com/editorials_03/holloway013003.html
http://www.gold-eagle.com/editorials_03/holloway021003.html
"With no central bank, private banks issued their own currency."
Excellent. When banks compete, we win: http://www.progress.org/2008/fold586.htm
"Gresham's Law was an observation on the complexities of people having to try to decide whose currency was good - and whose wasn't."
Here's an overview of how the theory works:
http://en.wikipedia.org/wiki/Gresham %27s_Law#Theory
Looking over the section it appears that Gresham's law is the idea that people only spend the "bad" money will keeping the "good" money for themselves. If business transactions are handled (under free commodity-based banking) the same way they are today without regulation, then businesses will already have an incentive not to put up with people who only use BS dollars in transactions. The REVERSE is true, if businesses want to STAY in business, then they have a financial incentive to NOT take the bad money.
"There is a substantial difference between allowing every state and bank to issue its own currency and a gold standard."
I'm not in a disagreement with this point in particular.
I voted no, because I do not believe returning to the gold standard would be a good idea.
I do think, however, that giving the issuing power of money to Congress, and ONLY to Congress, makes much more sense than giving it to a private banking corporation, such as the Federal Reserve. I believe that history vindicates the following words of our past presidents:
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks...will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. -Thomas Jefferson
History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance. -James Madison
If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations. -Andrew Jackson
The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity. -Abraham Lincoln
Issue of currency should be lodged with the government and be protected from domination by Wall Street. We are opposed to...provisions [which] would place our currency and credit system in private hands. - Theodore Roosevelt
For the entire history of the United States, private banks were able to coin their own money . This is not only nothing new, but is how most American money was coined.
Until 1873, anyone could coin any money they chose, by using their own silver or gold.
This is part of why the US economy nearly collapsed in the 1850s, accelerating the economic conflict that climaxed in the Civil War. The discovery of gold in 1849 led disastrous inflation in the US, and then a roller coaster of inflation and deflation.
This is why so many people advocated retaining the fiat paper "greenback", after the Civil War.
Giving the power of printing money to Congress would be disasterous. Congress is composed of members who must be elected every two or six years, so the process of creating money would be politicized. Members of Congress would have huge political incentives to vote for printing more money when the budget is in an abnormally large deficit (which is what some countries do--the result is hyper-inflation) or if they wanted to shower money on their consituents without adding to the deficit or raising taxes. The way things are done now, the Fed introduces money into the economy by buying treasury bonds from private banks and citizens, exchanging money for government assets. Congress would not be able to introduce newly printed money directly into the money supply in such a way--they would only be able to spend it on government programs or hand directly to taxpayers. The result would be that government expenditures would rise accompanied by a decrease in private investment, giving more power over the economy to Congress. This would exacerbate future problems, and, since investment would decrease, would lead to a huge devaluation of stocks and bonds (since less capital would be available to banks for lending out to private firms for investment expenditures) and much lower growth throughout the economy. The Fed has no political conflict of interest, and can much more effectively pump money into the economy, so, if we must give someone the power to print money, that power must be given to the Fed.