From Heinz ...
Notes:
1) His comments are in bold responding to ideas presented by others.
2) My historical perspective simply is not as good as his and I do not really wish to carry this debate much further by Email either. That said, I simply had to let him clarify his position on Fekete as to which there seems to have been some misunderstanding.
3) Following is his reply to me, with his position in bold (except at the end as noted)
" No one claims that a gold standard leads to economic upheaval, although a botched return to the gold standard is one of the conditions that led to the great depression. The contention was that a gold standard is not as stable, in the short-run, as some of its most recent proponents would have you believe. "
if a recall correctly, the US officially WAS on a gold standard throughout the period in question. it didn't need to 'return' to it. the major reason for the Great Depression was the expansion of credit by the Federal Reserve during the 1920's boom. of course the official gold standard had become a farce in the face of fractional reserve banking under the Fed system.
" Neither the gold standard, nor a fiat regime as currently practiced has much effect on long-term economic growth."
the historical record clearly argues otherwise.
" You are making an error in assuming that a long-run stable relationship between the marginal value of gold vs. goods and services implies a short-run stable relationship. The historical record is pretty clear on this. But let's not overstate the case; the short-run stability of a gold standard is on a par with the best of the currently practiced fiat regimes. "
what's all this sudden harping about the 'short run' about? in a truly free market, there will NEVER be 'short run stability', whatever that is actually supposed to mean. the major difference between a free market money regime and a fiat regime is that in the former, malinvestments get liquidated much quicker, and as a result, economic imbalances do not tend to cumulate. furthermore, since non-wealth generating activities are not supported, long term economic growth is far more solid, as fewer resources are wasted. in a fiat regime, market attempts to liquidate malinvestments are frequently 'papered over' - this creates the illusion of 'short run stability' at the price of long term economic underperformance and the cumulation of malinvested capital. in the end, such periods as the Great Depression result - huge, long lasting busts that occur when the fiat credit expansion eventually stops and goes into reverse.
"That isn't much different from the 3.29% rate that obtained from 1839 to 1929, but within those years were growth rates over 7%, such as between 1849-1859. " (ref. to the growth of the global stock of gold)
my point was merely that such large temporary jumps in the global rate of growth in the gold stock have become extremely unlikely. contrary to the pre-20th century period, the worlds major gold systems have basically all been discovered. in addition, the size of the existing stock of gold is much larger, so even a large discovery would not change much in terms of this growth rate. this means a gold standard would be even more stable these days than it has been in the past.
"To the extent that any asset, including a fiat currency, can be exchange for goods and services then there is no limit to the marginal utility of that asset (notwithstanding the limit of complete satisfaction of wants and needs). "
in reference to Fekete - i agree, i completely forgot that i had already rejected Fekete's argument after at first accepting it. actually, the correct view is that the marginal utility of exchange value goods such as money tends to decline at a much slower rate than that of subjective use value goods - to the extent that there actually exists a broad choice of such subjective use value goods, which clearly is the case. and it does not matter what form the exchange value good takes (i.e., if it's gold or something else).
"The state can take on as much debt as the public is willing to lend it, and given a growing economy that implies a continuously expanding debt. You can't really be seriously asserting that governments finance primarily through money supply expansion? "
in view of the money supply expansion that has taken place in concert with exploding deficits since the abandonment of the final vestiges of the gold standard in the early 70's, i can indeed so argue. the correlation is more than obvious. under a gold standard the willingness of the public to lend the state money would indeed represent the limit to its ambitions to grow its debt. this is a major reason why the fiat money system should be rejected - it amounts to a 'hidden tax'. it is by the by NOT an automatic conclusion that a growing economy means a continually growing state indebtedness. who says the state must run a deficit?
"Most of the 19th century US financial crises were the result of an overly restrictive money supply, i.e. an inability for currency supply to meet a rising demand, due mostly to bond collateral requirements, restrictions on portfolio diversification, and the prohibition on branch banking. That is far from a laissez faire approach. The fact is 19th century banking failures were a direct result of banking regulation, i.e. government failure, and the creation of the Federal Reserve was the governments attempt to solve the inelastic currency problem it had created in the first instance. And while the Federal Reserve has a lot of the blame to share for the great depression, the botched return to the gold standard, and state controlled and encouraged price fixing must share at least equal blame. Hence the entire great depression was an inevitable consequence of socialist/progressive tendencies that prevailed from 1850 to 1980."
i agree that state intervention played a role in those crises that have taken place, but it has absolutely nothing to do with a failure to expand the supply of money. the so-called 'inelastic currency' problem does simply not exist. blame for the Great Depression does indeed lie with the Fed, but certainly not the 'socialist tendencies' of the period 1850-1890. this is ridiculous in the extreme. there wasn't even an income tax in that period, no welfare state, etc. - the introduction of socialism to the United Sates happend under FDR in the period of 1931 - 1945 (to be fair, he only picked up where a previous interventionist, Hoover, left off). the depression began due to the credit expansion and associated malinvestment of the 1920's keeling over as the Fed belatedly 'tapped the brakes' to stop runaway stock market speculation. it then proceeded to unnnecessarily lengthen, as the Fed reacted by massive infusions of bank reserves (free bank reserves rose by over 400% between 1929 and 1933, in spite of about 9,000 banks going under) and FDR's government began its socialist intervention program on a grand scale (a program that included such nonsense as burning entire harvests in a failed atempt to shore up prices of agricultuaral commodities!).
regarding the apparent problem most people have with grasping what is and isn't important w.r.t. the money supply, i highly recommend reading a few articles by F. Shostak, who does a great job of explaining the issues. including the first one that asks the question of whether a falling money stock actually 'caused' the depression (the answer, in short, is no, but this should be seen for the wealth of data alone):
Note: All the rest is from Heinz as well and is not bolded.
a quote from Ludwig von Mises:
"The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do."
Mises quotes on the gold standard (they nicely summarize the case for it):
mises.org
Shostak (this is highly recommended fare regarding monetary theory):
1. Does a Falling Money Stock Cause Economic Depression?
mises.org
2. Can More Yen Save Japan?
mises.org
3. The Money Multiplier: Myth or Reality?
mises.org
4. Currency Devaluation and Economic Growth
mises.org
5.Making Sense of Money Supply Data
mises.org
6. How Does Money Acquire its Value?
mises.org
7.The Supply-Side Gold Standard: A Critique
mises.org
8. Is the Fed an Inflation Fighter or Creator?
mises.org
9.The Myth of the Magical Multiplier
mises.org
10. The Myth of Shock-Free Monetary Policy
mises.org
11. The Fed Cannot Fix Itself
mises.org
12. Is There a Glut of Saving?
mises.org
13. The Subsistence Fund
(on the pool of real funding)
mises.org |
