Golden Fetters

by Henry on February 24, 2012

From David Marsh’s book on the origins of the euro, some indication that the last few years of gold standard lunacy were baked into the cake from quite early on.

The two leaders [Giscard d’Estaing and Helmut Schmidt] professed the common aim, at a wider European level that superseded national borders, to regain monetary stability forfeited through a century of war and disruption. According to Giscard, the road to a European money was part of a journey that had been abandoned when the Gold Standard ended:’During the second half of the nineteenth century, up to the 1914 war, France enjoyed continuously successful economic growth, and a steady build-up of its engineering industry, with a currency that was totally stable. With their roots in a rural economy and their cultural leaning towards the fundamental values of savings and thrift, the French as a nation cannot cope with an inflationary economy and a weak currency. They thrive on stable money.’ Schmidt, too, affirmed a link between the goal of EMU and the Gold Standard:’We had a currency union up to 1914 in Western Europe – the Gold Standard. From a historical point of view, I would draw a direct parallel.’ (p.69)

{ 55 comments }

1

Sandwichman 02.24.12 at 9:12 pm

I just finished reading Carl Wennerlind’s Casualties of Credit: the English financial revolution, 1620-1720. Wow! Lunacy isn’t strong enough to describe gold buggerism. We might as well go back to the loin cloth, rubbing sticks together to start a fire and the bow and arrow while we’re at it. Although the problem remains that, unlike our ancestors, we wouldn’t know how to shoot the damn arrow or what to shoot it at.

Once upon a time, money was based on the security of tangible things. Then it was based on the security of reliable people — landed gentry and wealthy merchants — and tangible things. But even when it had been based on tangible things, it was still based on reliable people. Today — TA! DA! — money is based on the scientific knowledge and technical analysis of trustworthy people: economists. Oh, wait…

So what the gold buggers are saying is we cain’t trust them economists. That may be true. But even if it is true, there is no going back. The alternative is not gold. The alternative is making economists and all those sorts of experts accountable so that they WILL be trustworthy. It means getting rid of the zombies, not replacing them with mummies.

2

bh 02.24.12 at 10:02 pm

I’m more and more convinced that the difference between the Theban Necropolis and Fort Knox just isn’t that big. Goldbugs produce a lot of number-filled handwaving, but the whole enterprise really does rely on a quasi-mystical assertion of the power of particular precious metals. And that’s completely nuts.

3

StevenAttewell 02.24.12 at 10:06 pm

Since when do farmers have a problem with an inflationary economy? Inflation historically was good for farmers, in that it made it easier to get one’s hands on cash and made it easier to pay off one’s bank loan.

As for the argument that French prosperity require stable prices, that’s ridiculous. You’d think as the country that impaled itself on the Gold Standard the longest during the Great Depression, they would have learned their lesson.

Yet another moment that makes me think that our leading center-right/right-wing technocrats are socialist revolutionaries in deep cover.

4

Phil 02.24.12 at 10:30 pm

That is an interesting look at a moment during the Giscard-Schmidt collaboration. However, not sure how it shows that the direction and politics of monetary stability over the course of the 1980s, 1990s, and 2000s were thus “baked into the cake”…

5

Antonio Conselheiro 02.24.12 at 10:30 pm

Good enough for Beowulf.

6

Antonio Conselheiro 02.24.12 at 10:35 pm

It pisses me off that the Greenbackers and Populists still have the reputation as funny-money crazies, when it was actually the major-party gold fetishists who were crazy. A lot of the goldbug statements are really quite bizarre.

In their “Monetary History of the United States” Friedman and Schwartz don’t exactly say that the Populists were right, but they tacitly accept some of their main points.

7

StevenAttewell 02.24.12 at 10:52 pm

Not only were the Populists right, they were actually incredibly sophisticated in their economic thinking. Lawrence Goodwyn may be a bit unfashionable these days, but his exegis on the greenbackers, the national sub-treasury plan, and the agriculture co-ops of the Farmer’s Allaince was really eye-opening.

8

mds 02.25.12 at 12:08 am

Yet another moment that makes me think that our leading center-right/right-wing technocrats are socialist revolutionaries in deep cover.

Tempting as that thought is, it would become a little more convincing if the Bring Back the Gilded Age Club would stop winning.

9

marcel 02.25.12 at 12:31 am

1) Putting sandwichman’s term, gold buggerism, together with a modified version of Lenin’s notion, making urinals of gold, gives me a delicious tinkle tingle.

2) Apropos the comparison of the Theban necropolis & Fort Knox, the difference is huge; the craftsmanship in the former is evidence that a high and mighty civilization once existed there. I don’t think the same can be said of the latter.

10

Memory 02.25.12 at 12:33 am

Eichengreen’s central argument is that the Gold Standard as it operated in the 19th century was not compatible with the political empowerment of the working class that was forced to pay the adjustment costs for deflation when the Gold Standard system ‘self-corrected.’ Once the social revolutions brought about by WWI had expanded suffrage and mobilized labor through a variety of (baneful and benign) institutions, it was politically impossible to impose these costs on a mass electorate and – knowing this – financial markets found national commitments to a gold peg no longer credible, destabilizing and ultimately destroying the system.

To choose a return to the Gold Standard in light of this knowledge (and I think Eichengreen has most of the story right) is to choose to in some way substantively roll back the empowerment of labor that took place in the early 20th century. Assume that this is known to some segment of European elites and think about recent and contemporary European politics (one might mention the decades-long fight for labor market reform to deal with the “crisis” of Eurosclerosis) from that perspective.

11

Antti Nannimus 02.25.12 at 12:55 am

Hi,

When I really want to weird myself out I reflect on the fact that the vast majority of my so-called “wealth” consists merely of a few abstract numbers periodically produced by the same type of many larcenous financial institutions who have recently demonstrated through the creation and handling of the sub-prime mortgage debacle, no regard for truth, honesty, or fiduciary responsibility of any kind. Furthermore, I believe because of the connivance of government there would clearly be no criminal or even financial penalty to them if they were simply to zero those numbers out tomorrow, and tell me I now had nothing left. And at that point I wouldn’t even have the financial ability to fight them and dispute it in the legal system. It’s actually a mystery to me why that hasn’t already happened to the 99% of us yet. What are they waiting for? The election of Mitt Romney? Or is it possible they might actually believe that would finally be going too far?

According to some experts, we should all now be converting our assets to hard gold specie and the guns we need to defend it. Problem is, with my aging eyesight and slow reflexes I’m no longer that good a shot.

Or maybe we should just trust them instead. I’m torn by indecision. Okay, now I’m weirded out again.

Have a nice day,
Antti

12

StevenAttewell 02.25.12 at 1:10 am

mds – allow me to refine my thesis. our leading center-right/right-wing technocrats are socialist revolutionaries who believe that immiseration is absolutely necessary as a stage in the development of the material dialectic in deep cover.

Memory – exactly. In a sense, this choice happened a while ago when the capital controls and fixed exchange rates of the Bretton Woods systems were abandoned. What makes this interesting is that we now have intra-regional globalization – and I think your citation of labor market reform as a panacea is quite apt. I favor labor market reform too, but you’d have to be mad or ideologically committed to anti-statism/workerism at all costs to think that supply is the major problem right now in Europe.

13

Happy Heyoka 02.25.12 at 2:16 am

I have a couple of friends who are socking away gold and silver and sending me emails about “fiat money” etc… it would be interesting to know (in dumbed down fashion, for yours truly) how that US centric movement relates to the Europeans mentioned.

Sandwichman wrote:

But even if it is true, there is no going back. The alternative is not gold.

Given what I understand about the potential to produce more gold (friends in mining technology…) and the whole Spanish-Incas-gold-inflation thing; what’s a viable alternative for the folks that require some “tangible” notation for recording debt.

Many sci-fi novels have “energy mass allocation” type units… is it even possible to recalibrate the modern economy to something like this?

My naive feeling is that giving a guys digging a ditch in China the same number of units as those digging a ditch in the USA is a good thing.

14

StevenAttewell 02.25.12 at 2:18 am

It’s not the universal unit that’s the problem – it’s the inability to alter exchange rates, and the hyper-commitment to zero inflation.

15

Kenny Easwaran 02.25.12 at 2:19 am

If you’re going to choose some particular good to be your currency, gold has a lot of advantages. It’s pretty much the densest substance that most people can ever get their hands on, so Archimedes’ bathtub trick helps avoid counterfeit. It’s rare enough that you can get a lot of currency value with a relatively small mass of it. It’s soft and malleable enough that you can break it down into smaller pieces for many transactions (although I imagine you would run into trouble shaving off 1/1000 of an ounce to buy a coffee).

Of course, all that being said, why would you do something so crazy as to make your medium of exchange subject to random inflation and deflation every time someone discovers a new mine, or a new industrial use for gold?! That’s an inevitable consequence of using any commodity that occurs naturally, rather than having an artificial, centralized control.

16

shah8 02.25.12 at 2:36 am

You would love to make your medium subject to random changes in supply and demand. That’s the fundamental attraction of gold buggery. If you’re the one with the access to information, or the only ones capable of real aggregation, then new gold invariably only runs through a few hot paws before it’s in your setup, and you’ve got softer money than all the other people who thinks gold is *this* hard now, currency-wise. You can grab good loans off of that gold at better terms than you should, and you can lever up to a position where you’re a market-maker, thereby able to tax liquidity, and rent seeker, you’ve got it made!

17

P O'Neill 02.25.12 at 2:49 am

The French fixation with “backed” money goes back at least to the Mississippi Bubble. But by the same token, the French should have understood better than anybody the lunacy of hanging in too long in such a system, since that’s the story of 1930s France.

18

Con George-Kotzabasis 02.25.12 at 2:58 am

The matador Henry has unfurled his red rag before the rampaging cerebrally blind by fury bulls to gore by their intellectually paper horns the Gold Standard. In their intellectual obscurantism they are ignorant of the fact that it is on the “golden fetters” that price stability is based and the G.S. is an unequivocally effective hindrance to inflationary credit expansion that would lead to an economic crisis.

One has to take a lesson from the TOUR DE FORCE pages of Wilhelm Ropke, the main architect of the German economic recovery after the War–who is an admirable and illustrious predecessor of Giscard d’Estaing, and Helmut Schmidt–of the vital role the Gold Standard plays on the exchange mechanism and in the stability of the capitalist system, and the great damage it did during the depression, by aggravating the latter even more, when the U.S. abandoned it. “The abandonment of the gold dollar by the Roosevelt administration must, indeed, be viewed as one of the most disastrous acts on record of any government and any country in recent times, both for the country itself and for the rest of the world.” Wilhelm Ropke.

19

marcel 02.25.12 at 3:13 am

One has to take a lesson from the TOUR DE FORCE pages of Wilhelm Ropke, the main architect of the German economic recovery after the War—who is an admirable and illustrious predecessor of Giscard d’Estaing, and Helmut Schmidt—of the vital role the Gold Standard plays on the exchange mechanism and in the stability of the capitalist system, and the great damage it did during the depression, by aggravating the latter even more, when the U.S. abandoned it.

Or, one could observe that the first countries to abandon the gold standard during the Great Depression were the first to recover and (slightly differently) experiences less unemployment and output decline, and that, more generally, the longer between the start of the GD in any country and its abandonment of the gold standard, the worse its economic performance and the longer before recovery began. As Krugman wrote recently, “OK, I’m aware of all internet traditions the problems here. To some extent we may be looking at reverse causation,” … Well it’s hard to develop a story here of reverse causation, since the recoveries followed abandonment of the gold standard. This is best we can do in terms of economic data. Many countries experienced the GD, some abandoned the GS relatively quickly, some hung onto it for dear life. Those in the former group also experienced less pain and earlier recoveries, those in the latter the opposite.

20

Omega Centauri 02.25.12 at 4:54 am

I think the variability of the value of Gold, versus a fiat currency, is that a certain segment of society distrusts central bankers more than it distrusts the unfolding of industrial changes. I think it has something to do with the myth that government is inherently evil.

21

Antti Nannimus 02.25.12 at 5:04 am

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Yours truly,
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22

Happy Heyoka 02.25.12 at 5:24 am

shah8:

That’s the fundamental attraction of gold buggery. If you’re the one with the access to information, or the only ones capable of real aggregation, then new gold invariably only runs through a few hot paws before it’s in your setup

Yes, if you play the “six-degrees-of-Kevin Bacon” game with the gold fanciers, you uncover a coin dealer, broker or a miner pretty quickly.

StevenAttewell:

It’s not the universal unit that’s the problem – it’s the inability to alter exchange rates, and the hyper-commitment to zero inflation.

Ok, but if your “universal unit” is also fundamental physical one, like say kilowatt/hour or newton/meter then you do your exchange rate on the way into the unit, and inflation just doesn’t happen unless the energy supply changes radically.
Again, I realise I’m being naive here, but it is impossible to buy up all the energy?

Omega Centauri:

I think the variability of the value of Gold, versus a fiat currency, is that a certain segment of society distrusts central bankers more than it distrusts the unfolding of industrial changes.

As someone living where regulation seems to have held the banks in check, it does seem that the industrial changes are at the forefront.

I think it has something to do with the myth that government is inherently evil.

I dunno about evil, but certainly operating at no more than the average of the intelligence of the participants…

23

Henri Vieuxtemps 02.25.12 at 9:56 am

Sandwichman sez: So what the gold buggers are saying is we can’t trust them economists. That may be true. But even if it is true, there is no going back. The alternative is not gold. The alternative is making economists and all those sorts of experts accountable so that they WILL be trustworthy.

I’ll note that this is not so much about trusting them economists, but rather about trusting them politicians, the political process.

And so, I guess the question is: would you prefer an ineffective and inflexible but more or less neutral mechanism, or the one that can theoretically be much more effective, but in practice, due to the inevitable corruption of the political process, is likely to be, occasionally, very destructive?

Which one do you prefer? I guess it must be a function of your general outlook on life, and your socioeconomic status.

24

StevenAttewell 02.25.12 at 10:45 am

Happy Heyoka – inflation not happening isn’t a good thing; you want inflation to happen so that money supply can grow along with population growth, productivity growth, and demand. Any fixed unit runs the risk of developing strong discordancies with those trends – if we’re taking energy, then you have a huge burst of inflation when a new oil or natural gas source is found/tapped as well as a potential for underlying deflationary tendencies if the rate of growth of energy doesn’t keep up with population, technology, and demand.

This is exactly what happened with the 19th century gold standard – in general, there was a deflationary bias that I would argue was a strong contributor to the recurrent panics and long depressions, and then you’d have the ’49 strike or the Yukon strike and you’d get a huge inflationary surge. Gold standard was a lot of things, but conducive to price stability it wasn’t.

25

otto 02.25.12 at 3:58 pm

Eichengreen’s central argument is that the Gold Standard as it operated in the 19th century was not compatible with the political empowerment of the working class that was forced to pay the adjustment costs for deflation when the Gold Standard system ‘self-corrected.’ Once the social revolutions brought about by WWI had expanded suffrage and mobilized labor through a variety of (baneful and benign) institutions, it was politically impossible to impose these costs on a mass electorate and – knowing this – financial markets found national commitments to a gold peg no longer credible, destabilizing and ultimately destroying the system.

This explanation encapsulates what was always the fundamental stupidity of the Euro. Even if you did not know the Gold Standard history, you could easily have seen that e.g. pre-Euro Italy devalued its currency when unemployment got too high, and that the Euro removed this instrument leaving, as the only remaining option, the politically-all-but-impossible ‘internal devaluation’ (i.e. imposing adjustment costs on a mass electorate).

Of course, we are where we are, just hoping for the best.

26

Henri Vieuxtemps 02.25.12 at 4:09 pm

@25 otto, so, if the gold standard and Euro prevent imposing the costs on a mass electorate, and the Lira easily allows to impose the costs on the mass electorate, this “fundamental stupidity of the Euro” must be in the eyes of the financial elites, right? Is that what you mean?

27

William Timberman 02.25.12 at 4:37 pm

So…all right-thinking people now agree that money is –more or less — an alchemical slurry of electrons and promises. Is it not therefore fair to assume that it’s the promises, not the electrons, that are problematic? One wonders how having a heap of gold somewhere that one could visit at will would help. It’s like saying that having a statue of God in the temple on top of the hill would resolve any uncertainties about whether or not He exists.

28

otto 02.25.12 at 4:59 pm

HV, not quite sure what you mean re. “must be in the eyes of financial elites”. Making sure that unemployment stays low enough to be politically compatible with stable democracy is worthwhile for both elites and the rest of us. “Internal devaluations” are much more difficult and politically destabilizing. So even though devaluation did reduce the real incomes of many workers (while allowing others to rejoin employment), the system as a whole stood to their benefit, compared to the alternatives (e.g. the Gold Standard and the Euro).

29

Henri Vieuxtemps 02.25.12 at 5:09 pm

The quote in 25, what it seems to be saying is that the GS makes it difficult to force the working class to pay the adjustment costs. It seems to be implying that the capitalists would have to pay the adjustment costs instead. So, to avoid that, they dropped the GS, to make it easier to force the working class pay the adjustment costs again. This is how I read the quote.

30

robotslave 02.25.12 at 5:39 pm

“…[ the Gold Standard as it operated in the 19th century ] was not compatible with [ the political empowerment of [ the working class that was forced to pay the adjustment costs ]]…”

Grouping and emphasis added. The quote, together with the rest of the argument, is from comment #10.

31

bh 02.25.12 at 7:21 pm

So…all right-thinking people now agree that money is—more or less—an alchemical slurry of electrons and promises. Is it not therefore fair to assume that it’s the promises, not the electrons, that are problematic?

I’d agree, but I’d also argue that the promises, for all their problems, are pretty damn useful as well.

Fundamentally, money relies on a social compact, and there’s no way to change that just by changing the substance from which it’s made. It’s both a technology and a human institution, like written contracts. And those technologies/institutions didn’t evolve in a relentless, impersonal process of optimization — it’s a lot weirder and path-dependent than that. But that doesn’t particularly bother me, and it’s something I think we all know in other contexts already.

None of this is to say that our current set of financial institutions and practices serve us well. I don’t think they do. But I think it’s really important to separate that from Ron Paul-esque metaphysical angst about ‘fiat money’ or whatever.

That angst, to me, is driven by cognitive dissonance. Money relies on the sort of government-driven agreement that, to a lot of libertarians, just shouldn’t — or can’t — exist.

32

Henri Vieuxtemps 02.25.12 at 7:56 pm

Just to say that “money relies on a social compact” is not a very good argument. Sure money relies on social contract, on trust and all that. However, if this social contract involves a rare mineral that can only be added to circulation little by little and through a lot of digging, then one can be reasonably sure that a year from now he will be able to exchange the same amount of the mineral for about the same amount of food. And when this social contract only involves small pieces of paper with some nonsense printed on them, so that unlimited amount of them can easily be added to circulation at any time, and without your approval, then, obviously, this is quite a different sort of a social contract. And of course this is only a figurative ‘contract’, because you don’t really have the choice of rejecting it.

33

Antonio Conselheiro 02.25.12 at 9:13 pm

“The abandonment of the gold dollar by the Roosevelt administration must, indeed, be viewed as one of the most disastrous acts on record of any government and any country in recent times, both for the country itself and for the rest of the world.”

It’s odd that this is cited triumphantly. The only possible response is “Why was it a disaster?” Does he believe that leaving the gold standard in the 1930s caused the 1929 depression?

My experience of today’s goldbugs is that they are moderately prosperous small businessmen who are acutely aware of their economic vulnerability in the present world and yearn for some solid manifestation of wealth that can be kicked and put under the bed. Gold standard currency is a nationalization of private hoarding, and that’s the problem.

Someone pointed out recently that gold isn’t a hedge against inflation, but it is a hedge against total political and economic collapse, e.g. the end of WWI in the Axis nations, or worse. But the smart ones know that with collapse your gold isn’t safe, so they’re gun nuts and survivalists to. You need both gold and lead.

And then, there’s thousands of years of Scythian and Goth fetishism.

34

Antonio Conselheiro 02.25.12 at 9:18 pm

The gold standard may protect against inflation, but historically it causes deflation.

It also makes the value of the dollar dependent on the quantity of gold produced. As Friedman and Schwartz admit, the 1870s-1890s deflation that the populists protested against was finally ended by the opening of new gold mines.

35

Sandwichman 02.25.12 at 9:22 pm

“I’ll note that this is not so much about trusting them economists, but rather about trusting them politicians, the political process.”

Don’t you mean them madmen in authority? Politician is a derivative function. Whereas in the distinct past the politician would have been a derivative of the public of gentlemen, today the politician is a derivative of the public of “serious people” (experts, pundits, crackpot realists, lobbyists, etc. all of whom pose as or employ economists to certify the feasibility of their distilled frenzies).

36

Sandwichman 02.25.12 at 9:23 pm

I meant to say “distant past” but, come to think of it, “distinct past” works for me…

37

Pete 02.25.12 at 9:40 pm

“then one can be reasonably sure that a year from now he will be able to exchange the same amount of the mineral for about the same amount of food”

1) Has that been fairly true in the past?

2) Can you be reasonably sure of the stability of your income in gold? (answer appears to be “no, sometimes there is crushing deflation”

38

Henri Vieuxtemps 02.25.12 at 9:45 pm

Nah, I don’t think they pose as or employ economists. They rely on demagoguery, produced and tested by think tanks. Calling bandits ‘job creators’, stuff like that.

39

Henri Vieuxtemps 02.25.12 at 9:53 pm

Can you be reasonably sure of the stability of your income in gold? (answer appears to be “no, sometimes there is crushing deflation”

Can you be reasonably sure of the stability of your income in paper? The answer appears to be “no”.

Sometimes there is crushing deflation. And with paper, sometimes there is crushing inflation. I’m sure there must be ways to deal with both problems.

40

Alex 02.25.12 at 11:46 pm

However, if this social contract involves a rare mineral that can only be added to circulation little by little and through a lot of digging, then one can be reasonably sure that a year from now he will be able to exchange the same amount of the mineral for about the same amount of food

Why? This requires:

1) No sudden gold discoveries. Meet the phrase “gold rush”. Note it’s not “gold trickle” or “gold ooze”.
2) No sudden gold shortage.
3) No sudden changes in wages.
4) No sudden changes in food prices. Using gold as a currency has no magical power over the weather.

41

bh 02.25.12 at 11:58 pm

HV,

I’m really hesitant to wade in, because your earlier responses don’t indicate you’re willing/able to respond directly and in good faith to what people are actually arguing. But as a final attempt — and by all means, feel free to cut and paste the first line of what I wrote, ignore the rest of the post, and then miss the point entirely, like you did in your previous response to me — a bit more on money as a technology:

When you change the the stock of money by a certain amont, it doesn’t have a fixed impact on price levels. You can’t just say, the money supply went up by X therefore inflation will go up by Y — that’s just not enough information. Those price level changes are also a function of velocity — the speed at which money changes hands and runs through the economy.

People who have failed to understand this — like Bill Gross — lost some serious money because they saw Bernanke shoveling cash out the door of the Fed. But in the aftermath of the financial crisis, everyone wanted to hold cash, and velocity of money was really, really low.

So flooding the world with money after the crisis did not, in fact, cause inflation. What if Bernanke hadn’t turned on the spigot? If you follow the same model that worked to explain the call Bernanke did make in the other direction, the answer is pretty clear: deflation. And deflation is really, really no fun at all — just ask the PIIGS.

The reality is, a currency just can’t be fixed to a number or to a static rate of growth. That will not get you macroeconomic stability in a modern market economy. In order to get that, you need to be able to be flexible in the amount of stock that’s in the system. That ‘fiat’ bit that sends Paulistas into a frenzy? It’s absolutely necessary.

And ferchrisake, would one of you guys read a financial history of the last couple hundred years (that’s not by a crank)? The pre-Fed days were INCREDIBLY volatile. The late 19th century was just one crisis after another. Yes, worse than now. And to the degree we’re not doing better, it’s because we’re still stuck with some of the same backwards ideas. Like the @#)$(*@)$ indefensible ridiculous gold standard.

42

chrismealy 02.26.12 at 12:11 am

This gold standard and 1914 business reminds me of the “with notably rare exceptions” game. If I remember Polanyi right WW1 had a lot to do with the failure of the gold standard. And they’re trying to bring it back?

43

bh 02.26.12 at 12:37 am

Alex:

Why? This requires:

1) No sudden gold discoveries. Meet the phrase “gold rush”. Note it’s not “gold trickle” or “gold ooze”.
2) No sudden gold shortage.
3) No sudden changes in wages.
4) No sudden changes in food prices. Using gold as a currency has no magical power over the weather.

All true. It also requires

5) No one passing a law abandoning the gold standard or changing the fractional reserve requirement.

Oh, but in the HV system, we wouldn’t do that, right? But what do we do when the amount of available gold is fixed but, say, the population grows and the economy increases? Well, we’d make some adjustments according to a formula and…

… we’re making laws & having a civilization. It’s just that we’ve made them around the supply of something that’s not even stable.

If you want a steady money supply — you shouldn’t, but say you did — just pass a law restricting volatility. Just pass, say, a constitutional amendment restricting the growth of M2 or something to 3%. This would do exactly what gold bugs claim to want, right down to the binding, predictable commitment.

That’s what I meant by a social compact. People aren’t buying gold to use with their home smelter. They’re doing it because they have an expectation that gold will hold as a a store of value in volatile times. You can’t eat it, and we’re not going to need extra electronics, dentistry, or jewelry — these are the main commercial uses of gold — if things get really rough.

If you just want to keep people from ‘debasing’ your preeecious, just say so in a law. Please don’t do it in a country where I live because you’ll completely screw up the economy, but at least you’ll be doing the thing you think you want.

44

bh 02.26.12 at 12:38 am

Arrgh, formatting foul on my part. I tried to put Alex’s part, which ends after point 4, in italics, but somehow botched it.

45

StevenAttewell 02.26.12 at 3:36 am

bh and Alex are quite right. This shouldn’t even be a debate, Henri. Historical evidence abundantly shows that the gold standard had wild swings of inflation and deflation. Let’s take the U.S for example. From 1801 to 1900, I count:
Years of more than 10% price swing from year to year: 13
Years of inflation above 2x the long-term average (i.e, more than 6%): 12
Two-Year periods of zero or negative inflation: 36

And some of these periods were epic. Between 1814-1833, prices swung wildly between mild inflation and extreme deflation, followed by four years of solid inflation; the same thing happened again between 1838-1855. Following the Civil War, there were 14 straight years of zero and negative inflation interrupted by one year of modest inflation followed by another twenty years of the same. Between 1901 and 1914, inflation went from 0% to 4% to 3.8%, then three years of zero inflation, followed by 3.7% followed by -3.6%, then 0, then 3.7%, then 0, then 3.6, then 2.4.

This is not the picture of a stable currency.

46

StevenAttewell 02.26.12 at 3:37 am

* source: http://www.minneapolisfed.org/community_education/teacher/calc/hist1800.cfm

And it’s 14 years of more than 10% swings.

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Peter T 02.26.12 at 9:34 am

The other thing missed here is that the gold standard NEVER EXISTED, in the sense that there never was a period when all the various monies in circulation were backed by gold or silver to any significant extent. Gold and silver were only ever used to establish one’s solvency at the start of trading, to close out the balance of an account at the end of a trading relationship, and to set a benchmark for the very hardest forms of currency. The latter is, of course, of crucial interest to bankers, but why economists persist in colluding with bankers to force these fetters on us is a mystery to me.

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Henri Vieuxtemps 02.26.12 at 10:43 am

Hi bh. Sorry that I don’t have time or desire to respond to your every sentence. With your permission, I’ll respond to a few:
So flooding the world with money after the crisis did not, in fact, cause inflation.

It didn’t? Then how come the price of gold doubled in the last couple of years? The price of oil almost tripled. I believe it’s a similar picture for pretty much all commodities. So, what exactly do you mean when you say ‘did not cause inflation’? Don’t bullshit me, brother.

If you want a steady money supply—you shouldn’t, but say you did—just pass a law restricting volatility. Just pass, say, a constitutional amendment restricting the growth of M2 or something to 3%.

Now, that the crux of it, isn’t it? Paper money is better because it’s more flexible, it allows to control the amount of currency in circulation. On the other hand, it’s also worse, because it allows to manipulate currency for the benefit of one group or another.

So, depending on who controls the spigot (as you call it), it could be used in various ways: to benefit creditors or debtors, importers or exporters, workers or capitalists. Or, to bailout large predatory financial companies or something. The more corrupt the political system becomes, the less likely it seems that these manipulations will be used for the benefit of the general population.

Are you with me so far? You must be, since you’re suggesting a constitutional amendment to limit the flexibility, flexibility, that is the advantage of the paper money.

But what do we do when the amount of available gold is fixed but, say, the population grows and the economy increases?

But the amount of gold is not fixed, new gold gets produced all the time. And you can export stuff and get gold that way.

More to the point, I’m not saying that the GS is the perfect system, not at all. I’m sure it’s a lousy system, like everything else. I just want to see a real discussion, rather than simply dismissing the opponent as a crackpot.

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Antonio Conselheiro 02.26.12 at 7:42 pm

Then how come the price of gold doubled in the last couple of years?

Since we’re off the gold standard, a doubling of the price of gold isn’t in itself inflation any more than a doubling of the price of turnips would be, but just one component of whatever is happening.

Based in the gold prices 1978-1982 or so, the possibility must be considered that the price of gold has been driven up by paranoid, ignorant goldbugs who have been fooled by Glenn Beck, with speculators in the background. The price of gold has only recently (2008) matched its 1980 high.

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Henri Vieuxtemps 02.26.12 at 7:56 pm

Fine, John, blame it on Glenn Beck (which is silly, btw), but all commodity prices went up, and the dollar fell against less troubled currencies, like CAD, AUD, and JPY.

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Antonio Conselheiro 02.26.12 at 8:10 pm

Your question was “How come the price of gold doubled in the last couple of years?” You asked that as though it were a devastating argument, but as it stood it was worthless. The last time the price of gold doubled in a couple of years, around 1980, it was speculation + heavily promoted paranoia. People who bought during that bubble had to wait 25+ years before they broke barely even. (When I liquidated the family estate 6 years ago, I sold my father’s gold at a moderate loss. If I had only waited for the next bubble!)

My response to your specific opening question was valid. I know nothing about your apparent main argument, the general rise in the price of commodities, though we’ve been hearing about several other reasons why the price of oil, the main commodity (and with it, food prices) might rise.

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Henri Vieuxtemps 02.26.12 at 8:34 pm

The word that you use – paranoia – is, of course, a metaphor. People who drive the price of gold up are not mentally ill, they simply don’t trust the paper currency anymore, they question its value. One of the reasons is that so much of it is being added to the circulation. I don’t see how this refutes my point.

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Doctor Memory 02.26.12 at 8:48 pm

It’s great that they questioned its value. What was the answer? Were their suspicions correct? How would you measure the extent of their correctness?

I’ll happily allow that invoking “paranoia” or “mental illness” does nothing to forward the conversation, but skepticism divorced from empiricism is no help either.

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Doctor Slack 02.26.12 at 9:08 pm

Antonio: Your question was “How come the price of gold doubled in the last couple of years?”

Actually, Henry’s larger question was “how come there is commodity price inflation more-or-less across the board?” While the answer “inflationary monetary policy” is not universally accepted (AFAICT no answer is universally accepted) neither is that answer obviously crazy or wrong.

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Antonio Conselheiro 02.27.12 at 5:39 pm

He should have led with his larger question, since his lead question could be easily answered, and because the gold standard has been the topic of the thread and to a considerable degree, of his own comments.

I’ll grant that “paranoid” was being used metaphorically, but isn’t it a good word to describe people who have predicted apocalypse every year since FDR went off the gold standard? And the goldbugs I have known have also had other fears, such as race war, Communist takeover, etc.

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