Going to a gold bullion standard, as we and the UK had in the past, would deflate our economy to zero. by James Luko
(centrist)
Sunday, August 14, 2011
A Gold bullion standard- whereby paper money can be exchanged for a fixed amount of gold at a fixed set price, is NOT good.
If the government were to continue to hold gold at a nominal set fixed price, a growing economy would deflate itself to zero.
A growing population increases economic activity, as economic activity increases, the economy needs a proportional increase in money supply to keep things constant- zero inflation zero deflation. That means, your economy can grow, and your money supply can grow- WITHOUT inflation or deflation.
If economic activity increases, but money supply does not, there is only one way to compensate, lower prices. As prices lower, thereby causing "deflation" we then push the economy to zero. This is why a federal agency needs to closely monitor the economy in order to increase money supply proportional to economic activity.
Indeed, this is a very simplistic explanation, but in short, this is why a gold standard is not a viable option. In fact, it was the gold standard which was a major factor in causing the 1929 banking crisis to develop into a full blown depression. Hoover himself stated that he demanded that the Federal Reserve inject money into banks on the brink of collapse, but that there was no money available, since the government had a limited amount of gold, and the US dollar at that time was backed by gold, the government would have had to allocate funds to buy more gold in order for more money to be printed. Since we did not have the required elasticity of a fiat currency- we created an instant- hyper-deflation which caused the economy to crash hard and fast, the 1929 depression- REASON- gold standard.
In addition, as the United States runs a trade deficit with many nations, America would be drained of its gold rather quickly (as foreigners would ask to trade in their surplus dollars for gold, as actually happened to America and Britain when they were on the gold bullion standard)-
The gold standard does not work for a growing economy, but only for a theoretical stagnant economy where all factors remain constant.
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There is very little that is true expressed in this article, and the author does not provide a shred of evidence to support his false conclusions. Let's take a look at what he says one paragraph at a time:
A Gold bullion standard- whereby paper money can be exchanged for a fixed amount of gold at a fixed set price, is NOT good.
What does the author have against honest money?
If the government were to continue to hold gold at a nominal set fixed price, a growing economy would deflate itself to zero.
I defy the author to present even a tiny piece of evidence to show that this is true. Deflate to zero? Is he out of his mind?
A growing population increases economic activity, as economic activity increases, the economy needs a proportional increase in money supply to keep things constant- zero inflation zero deflation. That means, your economy can grow, and your money supply can grow- WITHOUT inflation or deflation.
This is the falsehood that monetarists like Milton Friedman...the ones who believe in surreptitiously stealing the value of people's money over time...support. The author confuses deflation with declining prices, as if to suggest that when prices are lower, it is a bad thing. In truth, except when the money supply is being centrally manipulated, falling prices indicate an economy that is doing what it is supposed to do: deliver goods and services at the lowest price possible.
If economic activity increases, but money supply does not, there is only one way to compensate, lower prices. As prices lower, thereby causing “deflation” we then push the economy to zero. This is why a federal agency needs to closely monitor the economy in order to increase money supply proportional to economic activity.
Well, he got part of it right. Yes, prices would go down, as they should, but just as rising prices do not "cause" inflation, falling prices do not "cause" deflation. The author demonstrates in this sentence his ignorance as to the nature of inflation and deflation. Price changes due to changes in the money supply show up as rising or falling prices, but that doesn't mean that the prices themselves cause the inflation. On the contrary, price changes are an effect, not a cause.
Indeed, this is a very simplistic explanation, but in short, this is why a gold standard is not a viable option. In fact, it was the gold standard which was a major factor in causing the 1929 banking crisis to develop into a full blown depression. Hoover himself stated that he demanded that the Federal Reserve inject money into banks on the brink of collapse, but that there was no money available, since the government had a limited amount of gold, and the US dollar at that time was backed by gold, the government would have had to allocate funds to buy more gold in order for more money to be printed.
The author is certainly a big government apologist, but that doesn't make what he wrote true.
First of all, the crash of 1929 was caused by a previous, massive expansion in credit (as measured in bank deposits) which created a huge stock market boom (hence the nickname, "The Roaring Twenties") followed by a bursting of the bubble (since all investment bubbles eventually burst). The dramatic increase in bank credit usage went largely into the stock market, and when it ran out, the market crashed. This credit expansion was fueled in part by Federal Reserve activities leading up to the crash.
Second, it's no wonder that Hoover was upset. He was spending far more than he had in the way of tax revenues, and like most power hungry politicians, he resented the limitation. He was frustrated by the fact that there wasn't enough government money to solve the consequences of all this bank lending.
Since we did not have the required elasticity of a fiat currency- we created an instant- hyper-deflation which caused the economy to crash hard and fast, the 1929 depression- REASON- gold standard.
This is a lie. We absolutely did have an elastic money supply, and that's what was causing all the problems. That's why the Federal Reserve was created in the first place, in 1913. In fact, creating an elastic money supply was one of the main arguments made in its favor by its most vocal proponents, including the primary author of the act, the German emigrant banker Paul Warburg. The Fed, from the moment of its creation in 1913, engaged in tremendous support of bank credit expansion, which (among other things) was used to make J.P. Morgan a ton of money by investing huge amounts of money in military weapon support for the combatants of World War I.
In addition, as the United States runs a trade deficit with many nations, America would be drained of its gold rather quickly (as foreigners would ask to trade in their surplus dollars for gold, as actually happened to America and Britain when they were on the gold bullion standard)-
Actually,the big problem from the perspective of the big bankers and the politicians, particularly after WWI, was that the U.S. was running a surplus (not a deficit) and that Great Britain was the one running a huge deficit (along with most of the rest of Europe). It wasn't until the Federal Reserve and the biggest Wall Street bankers made private agreements to send gold overseas to Britain at favorable terms to them to help cover up Britain's deficit spending that the gold started flowing out of this country. So the problem wasn't the gold standard. The problem was the bankers and politicians who were doing their damnedest to undermine the gold standard.
The gold standard does not work for a growing economy, but only for a theoretical stagnant economy where all factors remain constant.
Not even close to true. In fact, the opposite is true. Elastic money is what destroys real growth. Instead, it inserts fake growth that drives the stock market far higher than it should be and passes it off as real growth. Real growth under a stable, steady money supply doesn't lead to crashes and depressions like elastic money growth does.
Posted By: Bill Gee
Date: August 15, 2011 07:55:18 AM
Walt,
You must feel like a broken record at times - frankly, I don't know why anyone would hold onto the false belief that we can print our way to prosperity given the sorry state of the global economy. Even if someone doesn't believe that switching to a "gold standard" is not the way to go, it's foolish to hold onto the old fiat model.
James,
Shame on you for bringing up such a complex monetary issue and present it in only six short paragraphs without ANY data to back up your thesis besides the widely repeated cultural falsehoods oft repeated by the wealthiest people in the world. While I would gladly defer to your expertise when it comes to issues surrounding International diplomacy and basic economic development, I'm afraid you're a bit out of your league when it comes to alternative economic models and their impact on microeconomic activities. While I admit that Walt's model of using precious metals to form a competing currency appears a bit "Utopian" at times, to claim that it has already been tried and failed is simply not true. We have never had a currency that has been permitted to seek its own legitimacy via the daily transactions of microeconomic actors, and therefore, we have never allowed the market to choose the best currency in which to promote true economic growth. Therefore, to make the claim that it will never work or that it would "ruin" the economy is simply reacting on fears of the wealthiest people who benefit the most from the current system.
Posted By: jamesluko
Date: August 16, 2011 04:18:03 AM
Wow, Walt and Bill really bashing me with a crow bar eh ? Ok, no problem. This is not an intellectual discussion, but one of simple explanations of economics.
I don’t see where gold is any more honest or dishonest than fiat currency when its still up to government to manipulate supply, purchases and price fixing of gold.
Yes, growth would deflate to zero, in past, America had deflation due to leapfrogs in productivity with turn of the century- new inventions, cottage industry transforming to factories- ect. Etc. But, once the economy has little productivity growth- 0-3%, as we have, a stagnant money supply would endlessly force suppliers to reduce prices to where “profit” growth would turn negative- bankrupting thousands of businesses as has happened in Japan- DEFLATION plus DEPRESSION. Just as America experienced in 1930’s.
A growing population increases economic activity, as economic activity increases, the economy needs a proportional increase in money supply to keep things constant- zero inflation zero deflation. That means, your economy can grow, and your money supply can grow- WITHOUT inflation or deflation.
Falsehood that money supply needs growth ? hardly. No, I think looking at overall inflation over the past 50 years shows that the FED has done an excellent job in regulating growth in money supply according to correlating increases in economic activity. With a growing population, you need growth in money supply- commensurate to increases in volume of economic activity.
Well, walt, difference in price increases and inflation- meaning growth in money supply per se. Deflating prices- WITHOUT commensurate increases in productivity- would eventually bankrupt businesses. Conversely, an increase in economic activity with a constant money supply would also force deflation- as sellers would be forced to cut prices as money supply would be spread thinner among growing economic activity and growing population. Over time, new businesses and labor would be forced to accept lower salaries and lower prices until you head in a downward spiral to bankruptcy. Stagnent money supply chasing more goods- what other result could there be ? That is economics 101.
Ah what ? A lie ? what specifically is a lie ? You mean, Hoover did not ask for cash injections for banks and was refused by the Federal Reserve ? That is true, not a lie, that is history. We did NOT have an elastic money supply, our money at the time required a constant 40% coverage by gold stocks, and therefore the HUGE amounts of liquidity that Hoover was requesting was not available, and to have printed the extra cash required raising the gold stocks. The appropriation for this was never approved by Congress, thus the FED did not have the available cash it would have had under our current monetary system.
“In addition, as the United States runs a trade deficit with many nations, America would be drained of its gold rather quickly (as foreigners would ask to trade in their surplus dollars for gold, as actually happened to America and Britain when they were on the gold bullion standard)”
I don’t understand your answer to this section Walt ? Yes, Britain first experienced the gold drain, then the US years later until Nixon cut it.
I never said that we can “print” our way to prosperity- that is not accurate to depict that I wrote that or even implied it- I did not- please cite where I did that ? That’s sloppy response writing. I only said and supported the law of the United States, that the Federal Reserve’s main responsibility with money supply is to track the economy closely so that increased economic volume- plus growing population- can have a greater supply of money- and with careful calibration, avoid deflation and high inflation- as some inflation is a good thing- as it acts as a buffer between a change in trends in the economy- that’s what I said, I never wrote or implied that we could or should “print” our way to prosperity. Please be more accurate next time.
Bill, shame on me to bring up such a complex monetary issue in only six paragraphs ? well, it’s a summary and I wrote that it’s a simple explanation- what is wrong with that ? I don’t think, short as it is, that the article skewed any aspect of my thrust of why a gold standard (bullion standard) is a non-workable idea, it’s dangerous for any growing economy.
I also disagree that we did not allow “alternative” models for banks or currencies, we had dozens over our history and all proved to be a failure.
My view point on gold is widely held because its true- and has proven itself to be far superior to any past model we’ve had, nor any other countries model. It’s given us a depression free long term incredible growth from post WWII until even today- where our standard of living is light years ahead of where we were 50 years ago.
I don’t consider our current system to be “erroneous.” The current financial crisis is due to poor oversight of Congress and not the basic model itself. Just as in a gold standard, if the rules are broken- the economy would suffer.
I don’t see where gold is any more honest or dishonest than fiat currency when its still up to government to manipulate supply, purchases and price fixing of gold.
What you're saying is that as long as government can manipulate supply and fix the price of gold, then gold is dishonest. But you overlook some key points. Government cannot fix the price of gold. Government can only fix the price of gold in dollars. Government cannot fix the price of gold relative to other goods and services. The real question is the one you are overlooking...how many dollars will the government issue relative to the gold it holds? If the number of dollars issued does not change, then there is no problem, but when the government gives the power of money creation to a central bank (the Fed in this case), which then expands bank credit thereby increasing the effective money supply, the net result is that the value of those dollars decreases relative to gold. When this happened in the 1920s, most people in the marketplace had never seen such a thing before, and even now a lot of people don't understand it. They didn't realize at the time that bank deposits count just as much as physical paper currency when counting the money supply. If they had realized this, they would have been much more reluctant to hold the paper currency and there would have been a run on the dollar as everyone turned in their paper for gold. Clearly, then, it isn't gold that is dishonest. Rather, it is government that is dishonest, and therefore since government issues the paper money (in this example), the paper money is dishonest by extension.
Fast forward to today, and a whole lot more people understand that bank deposits count as money. Therefore, the monetary expansion that took place in the 1920s without economic reprisals (in the form of a run on the dollar) could not happen today. More and more people today realize that it doesn't make sense to hang onto paper money when it is being inflated against gold. Indeed, that's precisely what happened in the late 1960s leading up to Nixon taking us off the gold exchange in 1971. He didn't take us off the gold exchange in 1971 because gold wasn't trustworthy. Rather, he took us off because he knew that government couldn't continue to live beyond its means by inflating the money supply without disconnecting the dollar from gold. That means that gold is the honest money, while the paper dollar issued by the government is the dishonest money.
Yes, growth would deflate to zero, in past, America had deflation due to leapfrogs in productivity with turn of the century- new inventions, cottage industry transforming to factories- ect. Etc. But, once the economy has little productivity growth- 0-3%, as we have, a stagnant money supply would endlessly force suppliers to reduce prices to where “profit” growth would turn negative- bankrupting thousands of businesses as has happened in Japan- DEFLATION plus DEPRESSION. Just as America experienced in 1930’s.
Let's go to basic definitions. You claim that "growth would deflate to zero", by which seem you imply that zero growth equals zero deflation and zero inflation. This phrase is irrational. If a zero growth rate equals zero deflation, then your claim that slowly increasing the money would produce growth (the Friedman Fallacy) must mean that you have growth without inflation. Yet, clearly, the money supply is inflating!
Additionally, your argument cannot explain stagflation. If what you say is true, if there is a direct, immediate ratio between growth and prices, then you cannot explain the combination of rising prices and economic shrinkage that stagflation produces. Similarly, your model cannot explain how there can be economic growth coupled with falling prices, as has happened at various times throughout history.
The only way to make sense of the whole thing is to realize that inflation is not about prices. It's about money. Prices are just a symptom of what happens to money. They are not an economic cause of anything (except hardship).
Furthermore, you claim that innovation is deflationary. You are wrong. Innovation is productive, and economic competition in bringing the fruits of innovation to market brings prices down, but that process is not deflationary. Once again, you have fallen victim to a fallacy: the idea that falling prices equal deflation. In truth, prices can fall without a single change in the money supply, and that is NOT deflation!
A growing population increases economic activity, as economic activity increases, the economy needs a proportional increase in money supply to keep things constant- zero inflation zero deflation. That means, your economy can grow, and your money supply can grow- WITHOUT inflation or deflation.
This is absolute rubbish. If this were true, then an increasing money supply could equal zero inflation. The reason you make this mistake is that you believe that increases in prices must immediately follow an increase in the money supply in order for it to be inflation. You do not grasp the idea that increases in prices will always follow increases in the money supply, but it may take 3, 4, 5 or more years later and still be the cause of those price increases. The delay occurs because the amount of time it takes for the newly created money to enter and participate in the economy can vary. We know that when we look at money supply changes over longer periods of time, the relationship between money supply increases and price increases becomes very clear indeed. This is because the long-term view does not allow us to get tripped up over the fallacy that we would need to see a short term increase in order to see inflation in relation to money supply changes.
Falsehood that money supply needs growth ? hardly. No, I think looking at overall inflation over the past 50 years shows that the FED has done an excellent job in regulating growth in money supply according to correlating increases in economic activity. With a growing population, you need growth in money supply- commensurate to increases in volume of economic activity.
Oh really? So I take it, then, that you approve of debasing currency in the long term and thereby stealing the value of paper money from people who save it and from people who live on fixed incomes. Well, this certainly sheds some light on your personal character and integrity.
Well, walt, difference in price increases and inflation- meaning growth in money supply per se. Deflating prices- WITHOUT commensurate increases in productivity- would eventually bankrupt businesses.
This is true, but it's hardly the fault of gold. Rather, it's the fault of a central bank that deliberately shrinks the money supply after a massive expansion, as happened in the late 1920s. It's one of the main reasons why an elastic money supply is such a bad idea, because an elastic money supply can also shrink.
Conversely, an increase in economic activity with a constant money supply would also force deflation- as sellers would be forced to cut prices as money supply would be spread thinner among growing economic activity and growing population. Over time, new businesses and labor would be forced to accept lower salaries and lower prices until you head in a downward spiral to bankruptcy. Stagnent money supply chasing more goods- what other result could there be ? That is economics 101.
No, that is economic bull****. Once again, you confuse deflation with price decreases. Prices that decrease without monetary deflation is not deflation! It is the natural market process by which goods and services become more affordable. This is known as prosperity.
Ah what ? A lie ? what specifically is a lie ? You mean, Hoover did not ask for cash injections for banks and was refused by the Federal Reserve ? That is true, not a lie, that is history. We did NOT have an elastic money supply, our money at the time required a constant 40% coverage by gold stocks, and therefore the HUGE amounts of liquidity that Hoover was requesting was not available, and to have printed the extra cash required raising the gold stocks. The appropriation for this was never approved by Congress, thus the FED did not have the available cash it would have had under our current monetary system.
Just because the Fed refused Hoover a cash injection does not mean that the money supply had not already massively increased. Where do you think all the credit came from that was used to bid up the stock market in the first place. From the Fed!
“In addition, as the United States runs a trade deficit with many nations, America would be drained of its gold rather quickly (as foreigners would ask to trade in their surplus dollars for gold, as actually happened to America and Britain when they were on the gold bullion standard)”
I don’t understand your answer to this section Walt ? Yes, Britain first experienced the gold drain, then the US years later until Nixon cut it.
At least now you're starting to ask the right questions. You just aren't going far enough. Why did the U.S. experience a gold drain after experiencing a huge influx? That's the question you should be asking yourself. If you'd like to learn more about the truth behind the gold drain, I recommend the book, The Creature From Jekyll Island, by G. Edward Griffin. It will enlighten you. I've already told you the short version of the story. Here's a slightly longer version of it, from Griffin's book.
In brief, here is what happened. After WWI, Britain, who had left the gold standard at the beginning of the war, returned to the gold standard in a fractional form afterward, but not a full gold standard. The U.S. had never left the gold standard, but it too was on a fractional version of it, which was how the U.S. had financed its support of the Entente Powers. The difference was that the U.S. was inflating paper money (in the form of bank deposits) much slower than Britain was similarly doing. That's why the gold was flowing from Britain to America.
In May 1924, Benjamin Strong, first chairman of the Fed, wrote a letter to Secretary of the Treasury Andrew Mellon in which he proposed that interest rates be lowered as a step toward monetary expansion with the objective of raising prices relative to those in Great Britain. In other words, the U.S. would stop collecting Britain's gold by using Fed tools to increase its own money supply. The Fed accomplished their goal by monetizing "...$492 million in bonds plus almost twice as much in banker's acceptances..." according to Griffin. A second burst of inflation came in 1927 with the same goal in mind, via the funding of an additional "$225 million in government bonds plus $220 million in banker's acceptances, for a total increase in bank reserves of $445 million. At the same time, the rediscount rate to member banks (the interest rate they pay to borrow from the Fed) was lowered from 4 to 3.5 per cent, making it easier for those banks to acquire additional 'reserves' out of which they could create even more fiat dollars. The amount created on top of that by the commercial banks is about five and a half times the amount created by the Fed, which means a total money flood in excess of $10 billion in just six years."
As I stated before, most of that money ended up in the stock market.
I never said that we can “print” our way to prosperity- that is not accurate to depict that I wrote that or even implied it- I did not- please cite where I did that ? That’s sloppy response writing.
Of course you did! You wrote, "A growing population increases economic activity, as economic activity increases, the economy needs a proportional increase in money supply to keep things constant- zero inflation zero deflation." It's true that you didn't write that in your article, but Bill was correctly anticipating your viewpoint, and you proved him correct by explaining it very nicely (and wrongly) in your comment defending your position.
I only said and supported the law of the United States, that the Federal Reserve’s main responsibility with money supply is to track the economy closely so that increased economic volume- plus growing population- can have a greater supply of money- and with careful calibration, avoid deflation and high inflation- as some inflation is a good thing- as it acts as a buffer between a change in trends in the economy- that’s what I said, I never wrote or implied that we could or should “print” our way to prosperity. Please be more accurate next time.
Bill was being quite accurate, as shown above. Once again, you demonstrate your contempt for all the people who have held that currency over the years or have lived on a fixed income (or both) and ended up losing the bulk of their money's value as a result.
I also disagree that we did not allow “alternative” models for banks or currencies, we had dozens over our history and all proved to be a failure.
This is highly misleading. We have had two models over the years, with one model being implemented in an endless number of variations. That model is the model of government manipulation of the money supply. Only for very, very short periods of time did we have an economy where such manipulation did not occur, and when that situation happened, the economy flourished.
My view point on gold is widely held because its true- and has proven itself to be far superior to any past model we’ve had, nor any other countries model. It’s given us a depression free long term incredible growth from post WWII until even today- where our standard of living is light years ahead of where we were 50 years ago.
No, your view is widely held because it is a terrific way for the many economists holding a political agenda to justify massive government intervention and expansion of the money supply in support of the government's many-armed attempts to increase its own power and influence in the name of "helping the people"...one of the biggest lies ever told.
I don’t consider our current system to be “erroneous.” The current financial crisis is due to poor oversight of Congress and not the basic model itself. Just as in a gold standard, if the rules are broken- the economy would suffer.
This statement is so completely misleading as to be fanciful. Who do you think empowered the Fed in the first place and set up the conditions for all the economic ills I described above? CONGRESS, OF COURSE!
