I dropped out of this thread when Animastryfe’s friend pegged my blood pressure. I need first to acknowledge that Whorfin was right and my attempt to oversimplify the story of fractional reserves was wrong.
There are two aspects to the fraudulence of the goldbugs. No, three.
There is the imaginary economics that does not take any identifiable understanding of how an economy works into account. I’m a historian so I’ll leave that in the others’ good hands.
There is the imaginary history that simply lies about what has happened. Fractional reserve banking occurred before central banks and the Fed. Inflation occurred before central banks and the Fed. Inflation occurred on the gold standard. Costs are more correlated with macro events than with manipulation. The important chart on this page* is the second one, in which the smoothness of long periods of time is erased and the underlying messiness of history revealed. Note that inflation dominated the entire period from 1900, the enactment of the Gold Standard Act, to 1934, when gold was depegged. The importance of the first graph is not that inflation has soared since Nixon removed the last link to the gold standard in 1971 but that inflation is never negative. Long periods of even 1% of inflation will double prices (in 72 years to be exact) and that makes a fixed price of gold uneconomical for the gold producers.
The third is that a single country can maintain a gold standard in a modern global economy without that having enormous effects on the price of gold throughout the world that would defeat any attempt to steady the economy. How would a gold standard operate without one country controlling all sources of gold? Gold would soon flee the country seeking higher prices which would inevitably happen unless an imaginary permanent global deflation sets in. That would destroy all economies so I wouldn’t root for it myself.
*The rest of that page nicely backs up what we’re been saying, although I came across it merely by searching for a good chart.
What others have said upthread but I’ll add my 2¢ as well. The money supply needs to expand at the same rate as the economy because deflation can be as destructive as inflation. In a deflationary scenerio gold and silver are the only things worth holding onto as stores of wealth; everything else, with the possible exception of productive real estate, is a loss. So you have a medieval situation: If you are lucky enough to get a hold of some specie, you hoard it instead of letting it circulate; quarter-farthings (one-sixteenth of a penny) are minted because coin is so precious relative to goods and services; and production is hobbled not only because loans are almost impossible to get at anything short of ursurious rates but because expanding production simply exacerbates the money shortage, making the economy self-limiting. Some historians believe that the injection of New World gold and silver into the European economy is what made the end of feudalism and the establishment of market economies possible. And it’s no accident that the rapidly expanding industrial economy of the nineteenth century produced floods of paper money- it was needed, even when it was of shaky value, because a “coin of the realm” economy just wasn’t workable anymore. The unregulated paper money supply did contribute to vast booms and busts, and by the twentieth century establishing national fiat money had become the lesser of two evils.
Of course, anyone who wants gold as a store of value can walk into any coin shop and purchase as much gold as they like, and bury it in their backyards. The fact that they can’t get government-issued coupons redeemable for a certain weight of gold isn’t exactly a cause for worry. And ironically, when we were under a gold standard it was actually illegal to hold gold this way. But of course it makes perfect sense when you realize that since the currency is backed by gold, and the government has extremely strong incentives to control the currency, therefore the government must control the market for gold.
So far from a system where free and sovereign citizens trade using real gold, it turns out that under a gold standard real actual gold is taken out of the hands of private individuals because it’s too important.
And of course, history shows again and again that even gold and silver coins are subject to manipulation when things get tough–the tyrants just add base metal to the coins, and then make it mandatory to accept the debased coins at the same rate as the pure coins.
Of course, once we accept debased coins, we might as well go whole hog and require people to accept wooden nickels rather than precious metal. And there we go, fiat currency.
The first is the CPI, which is to say, the general price level. This is the sticker value of goods and services. The second is the change in the general price level: the inflation rate. (In math terms, we could look at these as the general price level and its first derivative). On a long scale, general price levels were stable with metal-backed currency. Any increase in prices was met with a deflationary period later. But you’re absolutely right that in the second graph we’re looking at the underlying historical messiness of the rowdy and unpredictable boom and bust cycles of the 19th century, with its rampant speculative bubbles and then deflationary panics.
But for my purposes, what’s most telling about the second chart is what happened after Paul Volcker’s term as Fed chair: there was still inflation, but it was steady inflation. Nice, calm, predictable inflation. Look at how wonderfully smooth that inflation rate is from the 1980s on. Shame that it doesn’t go up to the present day, or we should see that inflation rate drop to 0 (bad juju there). But even with the latest crisis, we’ve had some deflation but not the terrible pits of deflation that they saw in the 19th century, and all because Bernanke was able to fire up the printing presses and issue another trillion dollars worth of monetary base.
So much easier and less traumatic than dropping a peg. All this Fed bashing, and people miss the point that the Fed has done a better job than precious metals ever managed in making sure people would know what prices would be like next year. We just had to unleash the wonks. The Fed was severely constrained in what it could do under the gold standard because the Federal Reserve had to ensure it had the gold reserves available, which tied its hands. The Fed gained its current monstrous importance precisely because the politicians gave it that power by dropping the gold standard, and yet what this means on a deeper political level is that control of our money supply is now completely in the hands of staid, boring technocrats instead of Congress and the president. The result? The most predictable, reliable, dependable, steady inflation we’ve ever had. The fiat system’s not perfect (and it’s only gone for 40 years), but it’s already made an overwhelmingly strong case.
Just a note, my friend is “Raptoreyes”. He’s already posted once in this thread (second page). I’m not going to take any sides on this thread, since my knowledge of economics is pretty basic, but Raptor is a reasonable person who does have an open mind most of the time.
No, you don’t hoard it. You spend it, or invest it, or perhaps save it, according to your preferences for consumption vs deferral.
You don’t sit on a giant pile of gold, and then go without food, or a TV to watch the NFL, or an occasional trip to Cabo San Lucas. Why would a change to the gold standard cause people to change their behavior w.r.t. savings and consumption? The only time I could see that happening is if they lose confidence in the currency, which is of course what happened pre-Great Depression.
You deal with deflating prices every day, and tradeoffs between consumption and deferral, without even realizing it. Here are three examples from modern life:
The computer example I cited above. Millions of people worldwide consider the tradeoff between buying a computer now, or waiting. Many have built in the expectation of more powerful computers at lower prices, coming slightly later in time, into their purchase decision. Perhaps you have as well.
The computer industry, along with the consumer electronics industry, has experienced some of the most massive price deflation in the history of mankind over the past 40 years. And yet billions of computers have been manufactured, creating trillions of dollars worth of wealth, and employed 10s of millions of people. How can that be?
Ever consider going to see a first-run movie, but then decided ‘Naah. I don’t want to wait in line, and spend $15 on a ticket. I’ll just wait until later until it comes out on DVD, or until the lines are shorter. It might also go to second-run theaters by then, and be cheaper.’ That’s baking in an expectation of deflation into a decision of immediate consumption vs deferral.
How about buying a car? Ever wait until next years models have come out, so you can get a good deal on the previous years models sitting on the lots? People do this all the time.
I could cite a billion other examples of where you, and other regular citizens, deal with deflating prices. Deflation by itself doesn’t cause any problems whatsoever. People manage expectations of increasing, or decreasing prices into their purchase decisions, and the tradeoff between consumption, investment and savings all of the time.
Why would any of that change because we went on the gold standard? The posts above are bizarre. You, and others, postulate that (somehow) if we went back to the gold standard, people would huddle around their little piles of gold, never going out, never spending anything, and never investing. What makes you believe people would change their behavior like that?
It’s the large whipsaw from inflation, to deflation, and back…and the associated uncertainty in prices, that causes problems. Because then you don’t know what to expect and cannot plan for the future. And THAT, my friend, is caused by fiat money. Not the gold standard.
We can say as many times as necessary that having the prices on certain objects go down is not the same as deflation. Nor is being a cheaper object in preference to a more expensive one an example of deflation. Deflation by definition is applied to the entire economy, not to individual pieces of it.
So if X = computer industry, Y = cars, and Z = movies, then somehow me saying that [X+Y+Z] examples are not deflation, but adding in 1 - [X+Y+Z] from the rest of the economy is deflation? Explain that one to me. Perhaps I’m misunderstanding.
I’ll let you define deflation, then. Go ahead. Do me a favor and try not to make it a circular definition, that somehow sneaks in something ‘bad’ as part of the definition.
And here, my friend, is where we shake hands and part friends.
I don’t want to turn over the control of my country’s monetary supply to ‘wonks’. I want them constrained by a physical resource. I want their hands to be tied…that’s the whole point of a gold standard. You can’t arbitrarily increase or decrease the money supply based on the decisions of a dozen or so human beings. You leave it to the market.
And that applies in general to government. I don’t want enlightened, elite people making decisions about my life. Amazingly, many many millions of people do. And they don’t just want to take those ‘wonks’ advice, and decide for themselves whether or not to implement that advice. They are willing to sign over the right for the ‘wonks’ to force them to do whatever they want.
You keep referring to the 19th century as a period of terrible deflation. Why was it so terrible? I think it was good. If you look at the wealth created between 1800-1899, and the increase in living standards as measured by
Life expectancy
Recovery from physical trauma
Power production
Time and cost required to travel, or send a letter
Communications, which went from somebody carrying a letter on the back of a donkey, to the wireless
Clean drinking water and sanitation
It was one of the greatest explosions of increased living standards, and creation of wealth, in the history of mankind. How could the deflation be so ‘terrible’? I would argue it was irrelevant, and possibly supportive of those business endeavors.
That’s how the CPI works, except that the CPI uses 211 categories and 38 geographic areas and more advanced math like a Laspeyres index. It’s the net total movement of the multivariate items that determines inflation or deflation. No individual examples need apply. That’s how orthodox economists calculate inflation.
However, for this discussion I’ll be happy to use Rothgard’s definition of deflation as “a contraction in the supply of money.” p. 1005
Because the sixteenth century was one of the few times in history that at least temporarily and locally, a country had too much gold and silver. Gold and silver had been so dear for so long that people had fallen ito the habit of thinking gold=wealth. The kings of Spain didn’t understand that you can’t buy whatever you want simply by dumping more money into the economy. In this case all those Spanish pieces of eight were as harmful to Spain’s long term economic health as any run of a printing press. Being on the gold standard didn’t magically protect them.
If Laffer, one of the most monetarist economists still left on the ground, believes that a gold standard is the cause of the most devastating deflations we seen - and that deflation was a bad thing - I’m not sure what your argument is. He also argues that the Fed had little influence or effect on the Depression, something else that the rest of us have been saying. I don’t agree with the implications of everything he says, particularly on taxes, but he undercuts your case so severely I no longer understand what you’re saying other than government = bad.
We’re in GD now, so yeah, you can hold fast to your opinions. They are yours, and this is the place for it, and you have every right to them, even when they’re based on fantasies no more real than unicorns and pixies.
I’ve already explained why deflation is bad. Repeatedly. I’ve got all of mainstream economics at my back from all over the spectrum. This is not a dispute between professionally trained libertarians and liberals. It’s a dispute between people who know what they’re talking about and people who haven’t the slightest clue.
And Exapno has already pointed out that the 19th century had inflation on net. On the long haul, prices were stable during the 19th century compared to the 20th, but the currency still inflated on net over the entire time period. My point, the point that I made repeatedly, is that periods of deflation can be especially harmful. And you know what? Those periods of deflation in the 19th century were especially harmful. They coincided with the “Panics” of that age, and they exacerbated those panics. Did average human welfare increase in the 19th century? Of course it did. But human welfare would’ve done even better if they could’ve avoided the deflationary periods. This is not the difference between growth and no growth–it’s the difference between strong, steady growth and growth that’s interrupted by long periods of suffering that could have been avoided with a different monetary system.
Evidence for this can be seen today. Right now, China is rapidly catching up from those centuries when it was left behind, and they’re doing it without a gold standard. They were having 10% annual growth before the crisis, and it seems they managed to avoid the worst of this latest worldwide downturn. China doesn’t have a gold peg. China doesn’t need a gold peg. A gold peg would be less stable than what they have now.
What’s especially hypocritical about this is that you have already admitted some of the problems of the 19th century. From your own post:
I agree entirely that large whipsawing in the price level is damaging. Now read the second table from Exapno’s cite. Where is the whipsaw effect? Not in the present era under fiat currency. The real whipsawing happened under the gold standard. You claimed earlier that whipsawing was bad, and when I pointed out that the most stable inflation rate we’ve ever had happened with the wonks’ control of the fiat currency, you immediately flipped and said that was a bad thing. Typical from any fundamentalist. The argument changes like mercury to support what you always wanted to believe. It’s the same reason you provide a link to Arthur Laffer about scary FDR and ignore him when he undercuts your deflation arguments (great catch from Mapcase there). You use what you think helps you and ignore the rest.
Well, you were right in the first place about whipsawing in the change prices. It’s bad, and if you really cared about that (which you don’t), you’d acknowledge the Fed’s superior ability so far to control those fluctuations with fiat currency. My other, deeper point about deflation coincides with this: the downward portion of that whipsaw is especially damaging. This is not disputed by any respectable modern economist in the world. Even today’s professionally trained hacks don’t dispute this, so far as I know.
I know you argue thus. You do so because your beliefs are based not on evidence, but on personal dogma. You believe what you believe, facts be damned.
This is GD, but I’m not going to debate with a market fundamentalist. But since this used to be a GQ thread, if you continue to post errors, I will continue to correct them for as long as it seems worthwhile. You want to make a moral argument? That’s fine. More power to you. But I’m not going to let you pretend that your moral arguments have some sort of factual foundation. They don’t. They never have.