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Pastimes : Book Nook -- Ignore unavailable to you. Want to Upgrade?

To: JF Quinnelly who wrote (369)	9/3/2001 10:43:36 AM
From: Ilaine	Read Replies (5) \| Respond to of 443

I don't think that it's strictly accurate to say "returning to the gold standard" - the US mint was authorized to freely coin both gold and silver prior to the greenback era. I don't know whether that statute was repealed during the Civil War, just that the government started issuing money backed by neither silver nor gold. When the government decided to return to metal money in 1873, the new statute did not authorize coinage of silver. Apparently the reason that gold was used more than silver right before the Civil War was the statutory ratio of 16 to 1, set in 1834. Before that, silver was used more than gold because in 1792, the ratio was set at 15 to 1, which is about what it was at the time for gold and silver as commodities. Shortly afterward the real ratio went above 15 to one and stayed there, but it was about 15.6 to 1 in 1834. Friedman says that the ratio was set at 16 to 1 at the height of the "bank war" between Andrew Jackson and Nicholas Biddle, who operated the Bank of the United States (I think this was the second one). The act was expected to weaken the bank by making gold coins an effective substitute for the bank's notes. Friedman definitely attributes the deflation that began in 1875 to the gold standard. "The increasing world demand for gold for monetary purposes coincided with the slowing in the rate of increase in the world's stock of gold and a rising output of goods and services. These forces put downward pressure on the price level. Stated differently, with gold scarcer relative to output in general, the price of gold in terms of goods went up, which means that the nominal price level (under a gold standard, the price level in terms of gold) went down. The downward pressure was relieved somewhat by a rapid expansion of the banking system, which increased the amount of money that could be pyramided on each ounce of gold. On the other hand, rising real income, plus the spreading monetization of economic activities, plus the declining price level itself increased the downward pressure in prices by leading the public to hold larger cash balances relative to their income (i.e. velocity declined)." Friedman, Milton "The Crime of 1873", Journal of Political Economy, Volume 98, Issue 6 (Dec., 1990), p. 1170. I realize that Austrian economists don't believe in velocity, but at any rate, deflation from 1875 to 1896 was 1.7% per year in the United States, at a time when the money supply was expanding. So I guess you'd call that price deflation, since Austrian economists only think an increase in the money supply is inflation. Not that you are an Austrian economist, just observing what others have said earlier on this thread and the Coming Collapse thread. I am not an economist, so I merely observe that the population expanded, and output per capita expanded, and the money supply expanded, but prices went down, and the ratio of gold per capita went down, and the ratio of gold to the money supply went down. One factor may be the ratio between the US dollar and the British pound. Just as they did after WWI, after the Civil War, they resumed the prewar parity between the dollar and the pound. The reason people living on farms and otherwise in rural areas got so angry about silver was that the wholesale prices for agricultural and other basic commodities fell at the rate of 3% per year. As Friedman explains it, farmers are sellers, and sellers want prices to go up, not down. Also, farmers are generally debtors, and as prices fall, that raises the real value of their debt. So farmers get a double whammy during deflation - the nominal price they get for their goods falls and the real value of their debt goes up. Friedman thought that either bimetallism or a silver standard would have kept prices steadier than gold did. He states that the Act of 1873 was "a mistake that had highly adverse consequences." Op. cit., p. 1177. But the harm was done in 1873, and switching to silver or bimetallism in 1896 would not have been good, either, because the gold standard was entering an inflationary period. Id. He doesn't say why, but I guess that's in another paper. I have no idea whether's he is right about causation, but he's the one with the Nobel Prize, not me.