Golden Fetters

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.

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.

Good enough for Beowulf.

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.

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.

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

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.

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.

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.

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.

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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.

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.

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.

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.

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.

“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.

“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).

“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”

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.

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.

Alex:

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.

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.

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.

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.

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.

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.

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.