It happened to an even greater degree in the sixteenth century with the discovery of the new world. The resulting flood of gold pretty much destroyed the Spanish economy. (There was also a lot of silver involved but I’ll just talk about gold here for the sake of brevity.)
The Spaniards, like some people in this thread, couldn’t wrap their heads around the idea that gold was just another commodity. They figured gold is wealth, more gold is more wealth, and they had more gold than anyone had ever had in history. So they spent it.
The first problem Spain found was that the more gold they spent, the less it worked. Gold became less valuable as the new supply reached the continent and the Spainards found they were paying much higher prices than they had anticipated. But no big deal; they had lots of gold. Although somehow the more gold they spent the worse the problem seemed to get.
The second, and more serious, problem is that gold is not productive. You can own it and you can spend it. Spain did both. Other countries in Europe didn’t have the easy access to American gold that Spain had. So they had to work hard and earn their share of Spanish gold. They built factories and workshops and planted fields in order to produce goods that Spain wanted to buy.
So the rest of Europe was developing its economy while Spain was just spending gold. The result was that Spain ended up consuming a lot of products and the rest of Europe ended up with strong economies and the gold Spain had spent. Spain became an economic backwater and countries like England, France, and the Netherlands replaced Spain as world powers.
Deeply insightful, Little Nemo. It took me my adult life to realize why that part of history played out the way it did. The cherry on the top is that those different approaches mirrored themselves in the New World. One sub-continent had plains and straw, the other had gold and silver. Which one would thrive?
For the latter part of the 1500s and on into the 1600s Spain was a debtor nation, spending more abroad than it took in. The result was a net outflow of gold and silver. Attempts were made to restrict the export of precious metals, but without much success. In the end it all simply dribbled away. The problem was that the conquest of the New World left Spain with a lot more money, but not that much more wealth, if you follow me. They didn’t realize that until too late, and suffered centuries of poverty as a consequence.
I participate in the (apparently vain) hope that he’ll condescend to answer any of my questions. My question “Which books did you learn political history from?” was very sincere. Certainly his claim that government eroded private property rights is exactly opposite to any gleanings I have from readings of history.
Another recent thread is based on a bizzare question like “When man first set foot in North America should they have said ‘I claim this super-continent for the Chief of Beringia!!’?” Was that Farnaby’s?
We have one poster who made the claim gold standards bring the economy to a “halt”.
We have another who says the sinking of a boat is “stimulative”.
The only poster who shows any sign of having even heard a cursory rundown of Cantillon effects is the “gold bug” Common Tater.
The only decent complaint of the anti-gold folks is that governments are liable to screw up a gold standard.
We have several posters who swear that IOUs are money. (One at least cited a study- clearly a case where an exception proves the rule)
We have one poster who says gold standards are bad because we may come across a New World supply of gold again and one country may suffer from lack of capital investment.
We have one poster who insists the economy is like an airplane.
My main points have not been touched:
Gold is not in fair competition with fiat.
Deflation and prosperity can and have coexisted.
Common Tater was right about Cantillon effects.
19th century panics had everything to do with fractional reserve banking.
Oh my. First of all, it wasn’t the loss of the boat per se that was stimulative; it was Crusoe’s agreement to pay for it. That much was very clear in my post — do I need to use bigger fonts? Smaller words?
Then I held your hand, and took you step by step through the process, explaining exactly why Crusoe’s debt was not only stimulative but also productive. Most embarrassing of all for you, is that you try to pass yourself off as having a layman’s knowledge of basic economics, and yet don’t know the difference between stimulative and productive — if you did you’d not have deceived yourself into thinking you’d refuted the former unless you were completely ignorant of the “broken window” effect. Here’s a text-book question about the stimulative effect of the Valdez oil spill that might help.
I had no need to refute it. It was an absurd statement on its face. I repeated your claim and felt it unnecessary to go any further. Your claims are similar in that way.
Firstly, stimulative is a word used my econometricians and politicians to describe government action. It is nearly never used in the way you used it. It connotes an outside force acting on the market. This is why I continued to put it in quotes. It was a strange usage, which is fine. I don’t get hung up on word choice because, as you’ve demonstrated, we are mostly laymen here. The fact you were able to rouse up an instance of the word being used as you used it tells me you have too much time on your hands.
Secondly, I would find it embarrassing if someone had demonstrated to me exactly what money was after I had spent pages and pages sneering at the person.
Lastly, taking on debt is not productive per se. It is a bit strange for you to suggest such a thing.
Wow. You really are too dogmatic to address a case on its merits. Friday lacked the capital to build a new, better boat; Crusoe paid a fine; Friday now could and did build a better boat. All so simple, and I did take you through it step-by-step — I can’t guess how you miss this. Do you get so hung up on trying to remember what you think words mean, that you can’t even follow a simple scenario?
Are you hung up on the difference between 100 fresh clams and an IOU for them? Suppose Crusoe pays cash — 100 fresh clams — and suppose Friday forgoes a feast because he wants his new improved boat so badly. Can you grasp that scenario correctly? If so, substitution of a marker for the clams that begin and end with Crusoe should be a trivial change. Is it possible that your dogmatic obstinence about the difference between specie and paper money is clouding your understanding of this trivial transaction?
On top of all this, your reply didn’t mention the “broken window/Valdez spill” effect I called your attention to. I guess you really are ignorant of that after all.
Work on the Crusoe/Friday problem with an open mind if you can. When you post a correct analysis of it, we can move on to some of your other fallacies.
Nice try. The 100 clams is what allows Friday to forego current production (consumer goods) and build a boat (capital good). An IOU does not have the same effect. Friday cannot forego current production because he may starve.
I’m not sure you actually understand the broken window effect yourself to be quite frank. Are you suggesting that a broken window is “stimulative”? If so, as I’ve mentioned, that is a contrived use of the term usually not seen in discussions of economics.
why would it be? The only reason people seem to latch onto gold is because of its rarity. yes, it’s pretty but isn’t that useful outside of applications where its resistance to corrosion is desirable. Why don’t we have a diamond or platinum standard instead? those are rare and pretty too.
I’d say the ability to adjust the value of a “fiat” currency is a benefit, not a downside.
Your attempts to salvage your flawed argument get crazier and crazier. Were the clams money or food? Did the gold standard fail because gold isn’t edible?
I don’t know if you’re capable of honest thought, but if you review objectively the Crusoe analogy you started, you’ll see that you’ve piled contradiction on top of contradiction.
Let me try this one more time. I’ll repeat and flesh out slightly the scenario which we’ve been using. First, Friday won’t “starve.” — he has access to berries and roots. Clams, like gold, are used as money because they’re a luxury good.
What Friday wants is a new, better boat. To build it, he needs to buy 100 clam’s worth of supplies from Crusoe’s store. Rather than laying 100 clams on the counter, he places Crusoe’s own IOU for the 100 clams.
And Farnaby — if his mumbling is sentient at all — seems to assume that Crusoe won’t honor the marker. Apparently for Farnaby, paper money is just no good — he still can’t get over Franklin Roosevelt’s stealing his Great-grandma’s gold at gunpoint!
I apologize to other Dopers for inflicting a 2nd-grade level simulation of an economy on them. But it seems to have served its purpose: It’s demonstrated that Farnaby’s grasp of simple economics is not even up to that of a 7-year old.
